Category: OECD Transfer Pricing Guidelines (2017)

OECD COVID-19 TPG paragraph 112

A range of technological solutions are available to replace and/or complement, traditional methods of communication, such as face-to-face meetings and the exchange of physical documentation, while maintaining confidentiality and security requirements. There may be situations where flexible approaches are not readily identifiable or appropriate, however, tax administrations and taxpayers should be encouraged to assess alternative approaches to maintaining progress in APA discussions on a case-by- case basis rather than defaulting to historic working methods or one-size fits all solutions. Effective use of tax administration and taxpayer resources is crucial during the period of the COVID-19 pandemic and practical experience suggests that the following have been utilised with success in certain cases: Virtual tax administration and taxpayer case conferences in the place of physical meetings (for example, telephone and video conferences) Virtual functional interviews with taxpayer’s employees Virtual taxpayer site visits in the place of physical ... Continue to full case

OECD COVID-19 TPG paragraph 111

Despite these potential challenges, the value of achieving advanced certainty and effective dispute prevention through APAs remains compelling. A number of tax administrations and taxpayers have identified a variety of ways to adapt working practices in order to overcome any practical impediments to working APAs. Tax administrations and tax payers should recognise that rigid adherence to pre COVID- 19 working practises may unduly lead to significant delays in APA negotiations. Instead, innovative and flexible approaches to ensure collaborative working in order to minimise delays in concluding APAs under negotiation should be encouraged ... Continue to full case

OECD COVID-19 TPG paragraph 110

The COVID-19 pandemic also presents practical difficulties for tax administrations and taxpayers currently negotiating APAs. Potential challenges may arise for a number of reasons including restrictions on domestic and international travel; enforced or voluntary working from home; or additional resource pressures as a result of efforts to manage responses to the COVID-19 pandemic ... Continue to full case

OECD COVID-19 TPG paragraph 109

Where taxpayers and tax administrations are negotiating APAs that are intended to cover FY2020, all parties are encouraged to adopt a flexible and collaborative approach to determine how to take into account the current economic conditions, and the various options discussed above in relation to the revision of existing APAs will be relevant. For example, consideration could be given to agreeing a short period APA covering the period affected by the COVID-19 pandemic and a separate APA covering the post-COVID period. Another solution could be to conclude the APA for the whole period (e.g. APA period of 2020-2024) with a condition that the relevant impacts of the COVID-19 pandemic will be analysed and reported annually once they are known, and retrospective amendments to the APA made accordingly, when appropriate. Another solution could be to extend the period of the APA to mitigate the short term ... Continue to full case

OECD COVID-19 TPG paragraph 108

In the current environment, taxpayers may be reluctant about continuing or initiating new APA applications. This is understandable given the significant level of economic uncertainty that many businesses face, uncertainty that for some taxpayers may mean it is not feasible to reach agreements on future APAs today. However, it is important to acknowledge the role of APAs in securing tax certainty for taxpayers and tax administrations, and in preventing future tax disputes ... Continue to full case

OECD COVID-19 TPG paragraph 107

However, tax administrations are likely to respond differently to the failure to comply with the terms and conditions of an existing APA, than to the failure to meet critical assumptions.55 This may reflect differences in the procedures prescribed by an APA agreement, domestic law or procedural provision. For example, it may be the case that where there is a breach in the critical assumption the terms of the APA prescribe that it should be cancelled unless otherwise agreed, whereas, the consequence of non- compliance may be that a tax administration can choose to cancel, revoke, revise or enforce an APA. 55 Section E.3 of Annex II to Chapter IV of the OECD TPG ... Continue to full case

OECD COVID-19 TPG paragraph 106

When considering the consequences of non-compliance with terms and conditions of an existing APA, tax administrations should adopt a similar approach to situations where there is a failure to meet critical assumptions. For example, when determining their response, tax administrations should consider (i) the terms of the APA; (ii) any agreement between relevant tax administrations as to how to deal with non-compliance; and (iii) any applicable domestic law or procedural provisions.54 54 Paragraph 74 of Annex II to Chapter IV of the OECD TPG ... Continue to full case

OECD COVID-19 TPG paragraph 105

When engaging with tax administrations, it is important that taxpayers are transparent and disclose all relevant information in a timely manner. In so doing, they will help to maintain the non-adversarial spirit and environment that is vital to the success of APA negotiations ... Continue to full case

OECD COVID-19 TPG paragraph 104

Where the critical assumptions of an APA are breached, it is important that taxpayers collect and provide tax administrations with relevant supporting documentation. Depending on the particular critical assumption and other facts and circumstances, this could include, but may not be limited to: A description of the narrowest relevant taxpayer business segment tracked by management that encompasses the entities and covered transactions involved in the APA. Forecast and actual business segment profits for the financial years ending with or within financial years affected by COVID-19. Copies showing any proposed or implemented modifications to pre-existing agreements or of new intercompany contracts among the controlled parties affecting the covered transactions. A narrative explaining the anticipated effects of the current economic conditions on an agreed transfer pricing methodology during the financial years affected by COVID-19 including whether it caused restructuring of its operations and/or changes in its risks ... Continue to full case

OECD COVID-19 TPG paragraph 103

As economic conditions will remain uncertain until at least the end of 2020, where taxpayers notify tax administrations of the failure to meet critical assumptions, tax administration may want to consider waiting for a reasonable period until data and information on the magnitude and longevity of the economic impact of COVID-19 are available before determining how to respond to a breach. By deferring their response, until more data and information is available tax administrations may find it easier to revise, rather than cancel, an APA ... Continue to full case

OECD COVID-19 TPG paragraph 102

The timing for addressing the terms of APAs impacted by COVID-19 is important. Where material changes in economic conditions lead to the breach of one or more of the critical assumptions, taxpayers should notify the relevant tax administrations as soon as practicable after the change occurs, or the taxpayer becomes aware of the change. Early notification is encouraged in order to give the affected parties more time to try to reach agreement on revising the APA, thereby reducing the likelihood of cancellation ... Continue to full case

OECD COVID-19 TPG paragraph 101

Revocation may be considered where: (i) there is a misrepresentation, mistake or omission that was attributable to the neglect, carelessness, or wilful default of a taxpayer when filing an APA request and submission, the annual reports, or other supporting documentation or in supplying any related information; or (ii) the participating taxpayer (or taxpayers) fails to materially comply with a fundamental term or condition of the APA. The pandemic has not altered that standard. Accordingly, revocations of APAs whose terms extend into the period of the COVID-19 pandemic should be limited (just like arising in any other circumstances) to situations where the actions, as provided above53, that meet the standard for revocation regardless of whether such actions arose because of the pandemic. 53 Paragraph 77 Annex II to Chapter IV of the OECD TPG ... Continue to full case

OECD COVID-19 TPG paragraph 100

In the context of the COVID-19 pandemic, there are two situations which may lead to cancelling an APA when it is established that: in FY2020 (i) there is a material breach in an APA’s critical assumption as a result of a change in economic circumstances; or, (ii) the taxpayer failed to materially comply with any term or condition of the APA. Cancellation would not, however, be automatic and the tax administration may waive cancellation under certain circumstances.52 Cancellation would have the effect of ending an APA on an agreed date or from a particular tax year or accounting period (e.g. after FY2019). 52 Paragraph 81 Annex II to Chapter IV of the OECD TPG ... Continue to full case

OECD COVID-19 TPG paragraph 99

In other circumstances, more general revisions may be required, depending on the specific facts and circumstances of a case, where allowed by domestic law. For example, tax administrations could consider evaluating the results of the transfer pricing methodology specified by the APA over the period of the APA, rather than on an annual basis, i.e. a “term test”. This approach would aggregate the financial results of FY2020, which may be exceptional, with the more normal results of prior and future years. In combination with this, tax administrations could also consider extending the period covered by an APA. Tax administrations could consider segregating the terms of the APA between financial years affected and unaffected by COVID-19, or cancelling an existing APA for FY2020 and then renewing the APA in a future period, potentially on revised terms. Alternatively, tax administration could also consider aggregating the financial results ... Continue to full case

OECD COVID-19 TPG paragraph 98

In some circumstances, it may be possible to retain some of the terms set out in an APA, but revise specific provisions for which the breach in the critical assumptions is relevant. For example, an APA may cover a series of controlled transactions for which the agreed methodology for only one specific transaction required revision ... Continue to full case

OECD COVID-19 TPG paragraph 97

Revision would be the appropriate response where there has been a material change in conditions noted in a critical assumption in the APA and the tax administration and the taxpayer agree on how to revise the APA.51 The revision of an existing APA would have the effect of changing the previously agreed terms of an APA. Under this approach, it is likely that the original terms of the APA would remain in force for the period up to FY2020, with revised terms applying for FY2020 and any subsequent year(s) subject to the economic circumstances derived from the COVID-19 pandemic. 51 Paragraphs 83 and 85 of Annex II to Chapter IV of the OECD TPG ... Continue to full case

OECD COVID-19 TPG paragraph 96

In some situations, the APA agreement, domestic law or procedural provisions may prescribe procedures to follow, or describe the consequences that will arise, in situations where there is a failure to fulfil critical In these situations, tax administrations should follow the prescribed procedures.46 In other situations, tax administrations may have some discretion over their response.47 Also in the event that the effect of the breach is not material, (Paragraph 75 of the Annex II to Chapter IV of the OECD TPG), the taxpayer and tax administration may agree to continue to apply the APA In the case of bilateral or multilateral APAs, a common and helpful practice is for the tax administrations to consult before imposing any unilateral changes,48 and such consultation is mandated in some APAs.49 In the absence of other rules and procedures prescribed by domestic law, when the guidance in Chapter IV ... Continue to full case

OECD COVID-19 TPG paragraph 95

When considering the consequences of the failure to meet critical assumptions, tax administrations and taxpayers should consider the (i) terms of the APA; (ii) any agreement between relevant tax administrations as to how to deal with the failure; and (iii) any applicable domestic law or procedural provisions.45 This section follows the guidance in Chapter IV, Section F and Annex II to Chapter IV of the OECD TPG. 45 Paragraph 74 of Annex II to Chapter IV of the OECD TPG ... Continue to full case

OECD COVID-19 TPG paragraph 94

Where tax administrations establish that the critical assumptions of an APA have not been breached, the existing APA, as agreed, must continue to be respected, maintained and upheld. If a taxpayer believes that the terms of the APA are no longer appropriate, it should not seek unilaterally to breach critical assumptions deliberately or fail to comply with the terms or conditions of the APA, and it should avoid making unreliable price adjustments or taking other actions that are not consistent with (or otherwise fail to comply with) the terms of the APA that it may view as not appropriate. Instead, where taxpayers have concerns, they should approach the relevant tax administration in a transparent way to discuss their concerns ... Continue to full case

OECD COVID-19 TPG paragraph 93

Whether there has been a breach in a critical assumption should be analysed on a case-by-case basis, and it should take into account the individual circumstances of the taxpayer and commercial environment. The COVID-19 pandemic has not had the same impact on all enterprises. While many industries and business have experienced a drop in demand and revenues because of forced lockdowns, others have expanded their consumer-base or benefitted from new business opportunities. Whether a breach has occurred may also depend on the duration of the disruption. If a breach has occurred, in determining an appropriate response, a tax administration should carefully consider the extent of the divergence between the agreed parameters in the APA and the new parameters under the COVID-19 economic circumstances43; and, the ability of the agreed transfer pricing methodology to reliably reflect arm’s length pricing of a controlled transaction under the new ... Continue to full case