Please enable JavaScript to view this website.

An Important Step Forward in Global Transfer Pricing

In 2013, the Organization for Economic Co-operation and Development (OECD) adopted a 15-point Action Plan to address Base Erosion and Profit Shifting (BEPS) among its member countries. 1 After two years of work, the OECD released the final BEPS reports in 2015 and, with them, created a new standard for global transfer pricing practice. 2 While several countries have already adopted the transfer pricing guidelines without changes, other countries, including the U.S., have been more hesitant. 3 Nevertheless, with the U.S. now coming on board4, the BEPS changes to global transfer pricing practice represent an important next step in modernizing the international tax landscape.

Among several goals, the BEPS initiative seeks to align transfer pricing outcomes with value creation5 and increase transparency and consistency in reporting across jurisdictions. 6 Prior to the BEPS guidance, the IRS required multinational enterprises (MNEs) to justify their transfer pricing positions from a U.S. perspective, but MNEs did not necessarily need to divulge the positions they took (or actual taxes they paid) in the other countries involved in any given transaction. 7 Action 13 of the BEPS initiative addresses this problem directly by requiring country-by-country (CbC) reporting of certain information like income, taxes paid, and certain measures of economic activity in each country. 8 Although the U.S. originally balked at CbC reporting, the overwhelming adoption of Action 13 has forced the IRS’s hand. 9 By not adopting CbC reporting, the IRS would be needlessly missing out on information that its counterparts across the OECD would be putting to good use in protecting their tax bases.

In addition to the transparency achieved by CbC reporting, Actions 8-10 of the BEPS initiative seek to align transfer pricing outcomes with value creation. 10 While this economic substance principle is hardly new to transfer pricing,11 the proliferation of intangible value in the economy has created opportunities for companies, particularly technology companies, to shift this value to low-tax jurisdictions without a commensurate shift in economic value. 12 One such method was highlighted in the recent tax ruling by the European Commission against Apple’s tax arrangement in Ireland. 13 Through a transfer pricing practice called a cost sharing arrangement, two of Apple’s entities in Ireland make annual payments to Apple in the U.S. to fund research and development efforts. 14 In exchange for these payments, the Irish entities gain certain rights to sell and manufacture Apple products outside of North and South America. 15 In this way, much of Apple’s profit outside of the Americas flows to Ireland. 16 Although the European Commission’s ruling was based on a state-aid investigation and is not precedent for future tax cases,17 Action 8 of the BEPS initiative makes clear that intangible transactions like Apple’s cost sharing arrangement will face tougher scrutiny in the future.

To support an entity’s entitlement to returns from the exploitation of intangibles under the OECD’s BEPS guidance, the entity must demonstrate value-creating functions related to the development, maintenance, enhancement, protection, and exploitation of the intangibles,18 though it’s not clear that these specific functions will be applied in the U.S. to cost sharing arrangements that have been ongoing for several years. 19 In any case, “[l]egal ownership of intangibles by an associated enterprise alone does not determine entitlement to returns from the exploitation of intangibles.” 20 These two products of the BEPS initiative – CbC reporting and a re-commitment to connect transfer pricing outcomes to real value creation – represent an important step forward in global transfer pricing practice, and a step that MNEs should keep in mind. With tax authorities taking a closer look at the economic substance of transfer pricing arrangements, MNEs must focus on early planning around the development and ownership of intangibles, and support any transfer of intangibles with commensurate value-creating activities in the appropriate countries.


  1. Organization for Economic Co-operation and Development [OECD], Explanatory Statement, OECD/G20 Base Erosion and Profit Shifting Project, at 3 (2015), http://www.oecd.org/ctp/beps-explanatory-statement-2015.pdf. 

  2. Id. 

  3. Marc Alms, Kieran Taylor & Cliona Donnelly, Has BEPS Signaled the Death Knell for U.S. Pharmaceutical IP Migration to Ireland?, 43 Tax Plan. Int’l Rev. (BNA) No. 5, at 16 (2016). 

  4. Laurie Dicker, Well, Knock Us Over With a Feather, ALVAREZ & MARSAL (Mar. 5, 2015), https://www.alvarezandmarsal.com/insights/well-knock-us-over-feather. 

  5. OECD, Aligning Transfer Pricing Outcomes with Value Creation, Actions 8-10 – 2015 Final Reports, OECD/G20 Base Erosion and Profit Shifting Project, at 9 (2015), http://www.oecd-ilibrary.org/docserver/download/2315351e.pdf?expires=1475094284&id=id&accname=guest&checksum=D4BFCE5B56F68C5DD16BBBA489DEA52C. 

  6. OECD, Transfer Pricing Documentation and Country-by-Country Reporting, Action 13 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, at 9 (2015), http://www.oecd-ilibrary.org/docserver/download/2315381e.pdf?expires=1475094482&id=id&accname=guest&checksum=FDEF1A745F23B087B3535D771C8DF5B7. 

  7. IRS Issues Proposed Regulations on Country-by-Country Reporting, PWC, at 1 (Dec. 24, 2015), https://www.pwc.com/gx/en/tax/newsletters/pricing-knowledge-network/assets/pwc-irs-releases-proposed-cbcr-regulations.pdf. 

  8. Id. 

  9. Laurie Dicker, et al., A Tale of Two Continents, ALVAREZ & MARSAL (Aug. 22, 2016), https://www.alvarezandmarsal.com/insights/tale-two-continents-it-was-beps-times. 

  10. OECD, Aligning Transfer Pricing Outcomes with Value Creation, Actions 8-10 – 2015 Final Reports, OECD/G20 Base Erosion and Profit Shifting Project, at 9 (2015), http://www.oecd-ilibrary.org/docserver/download/2315351e.pdf?expires=1475094284&id=id&accname=guest&checksum=D4BFCE5B56F68C5DD16BBBA489DEA52C. 

  11. Dolores Gregory, IRS on Pricing Intangibles: It’s the Economics, Stupid, BLOOMBERG BNA (Jun. 17, 2016), http://www.bna.com/irs-pricing-intangiblesits-n57982074333/. 

  12. See generally, Global Taxation of Intellectual Property, ERNST & YOUNG, http://www.ey.com/Publication/vwLUAssets/EY-global-taxation-of-intellectual-property-20160518.pdf/%24FILE/EY-global-taxation-of-intellectual-property-20160518.pdf. 

  13. Apple To Repay €13 Billion in Tax, TP MINDS FOCUS (Aug. 30, 2016), http://tpmindsfocus.com/apple-illegal-taxes-eu/?utm_source=TP%20Minds%20LinkedIn%20Groups&utm_medium=LinkedIn&utm_campaign=CONTENT%3A%20Apple%20Should%20Repay%2013%20Billion%20in%20Tax%20to%20Ireland%2C%20Commissioner%20Rules. 

  14. Id. 

  15. Id. 

  16. Id. 

  17. Conor Humphries, OECD Official Says EU Apple Ruling Not Precedent for Future Tax Cases, REUTERS (Sept. 26, 2016), http://www.reuters.com/article/us-eu-apple-oecd-idUSKCN11W28D. 

  18. OECD, Aligning Transfer Pricing Outcomes with Value Creation, Actions 8-10 – 2015 Final Reports, OECD/G20 Base Erosion and Profit Shifting Project, at 64 (2015), http://www.oecd-ilibrary.org/docserver/download/2315351e.pdf?expires=1475094284&id=id&accname=guest&checksum=D4BFCE5B56F68C5DD16BBBA489DEA52C. 

  19. Dolores Gregory, IRS on Pricing Intangibles: It’s the Economics, Stupid, BLOOMBERG BNA (Jun. 17, 2016), http://www.bna.com/irs-pricing-intangiblesits-n57982074333/. 

  20. OECD, Aligning Transfer Pricing Outcomes with Value Creation, Actions 8-10 – 2015 Final Reports, OECD/G20 Base Erosion and Profit Shifting Project, at 64 (2015), http://www.oecd-ilibrary.org/docserver/download/2315351e.pdf?expires=1475094284&id=id&accname=guest&checksum=D4BFCE5B56F68C5DD16BBBA489DEA52C. 

The following two tabs change content below.

Cody Conwell