United States

UN initiative focuses on transfer pricing in developing countries

Taxpayers should be wary of positions in UN Transfer Pricing Manual

INSIGHT ARTICLE  | 

NOTE: The UN released a revised and updated manual in early April 2017. Read more here.

In 2012, the United Nations (UN) published the Practical Manual on Transfer Pricing for Developing Countries to provide transfer pricing guidance for multinational enterprises (MNEs).  As the international tax landscape continues to evolve, the UN has indicated significant changes to the manual are under consideration to account for both the Base Erosion and Profit Shifting (BEPS) initiative driven by the Organisation for Economic Co-operation and Development (OECD) and other international tax initiatives. 

A UN subcommittee revised the manual in 2013 and again in 2016.  Though the 2016 revisions have not been released in the form of an updated manual, the UN has advised the manual will contain four parts:

  • Part A relates to transfer pricing in a global environment;
  • Part B contains guidance on design principles and policy considerations;
  • Part C addresses practical implementation of a transfer pricing regime in developing countries; and
  • Part D contains country practices, similar to Chapter 10 of the previous edition of the Manual. 

In the country practices section of the manual (anticipated Part D and current Chapter 10), an individual country is offered the opportunity to provide its viewpoints and experiences for the information of readers.  The continued inclusion of a country practices section in the manual should give pause to taxpayers and practitioners, primarily because countries are using the section to provide concepts outside existing regulations for transfer pricing purposes. If the information in the country practices section is considered authoritative (or even persuasive authority), it could cause significant uncertainty.

For example, in the current China Country Practice section, Chinese representatives promote the location savings concept as a viable position. Location savings are net cost savings an MNE derives from moving operations from one jurisdiction to a new jurisdiction. Under the location savings concept, when an MNE moves operations, it must ensure the unit amount of profit earned at the new jurisdiction is equal to the unit amount of profit that would have been earned at the prior jurisdiction. Hence, the Chinese representatives imply that an MNE who moves operations from a jurisdiction where 12 units of profit are earned on costs of 150 units (8 percent profit) should ensure 12 units of profit are allocated to operations in the new jurisdiction (irrespective of profit percentage measures).

From a regulatory perspective, the location savings concept is not codified, and taxpayers and practitioners have not been able to pursue it as a means of establishing appropriate transfer pricing.  While the example in the country practice section was intended by the UN as information for readers, taxpayers face the possibility that tax representatives will use such arguments to defend against an audit, simply because the positions are presented in the country pratices section of the UN manual.

Similarly, Chinese representatives cite a lack of reliable, publicly available comparable information obtained from companies in developing countries as a challenge for transfer pricing analyses. Hence, the Chinese representatives suggest that an MNE who is seeking comparable information for companies in developing countries should prepare adjustments for reliable, publicly available comparable information obtained from companies in developed countries.

From a regulatory perspective, the lack of reliable, publicly available comparable information obtained from companies in developing countries is well known, but there is little codified regulatory guidance requiring adjustments. The OECD is developing a toolkit to provide guidance regarding the challenges presented by a lack of comparable information but early drafts do not include definitive guidance. Again, while the example in the country practice section was intended by the UN as information for readers, taxpayers face the possibility of such viewpoints being presented and defended by tax representatives, simply because they are presented (though not codified) in the UN manual.

Whether the UN transfer pricing manual is seen as guidance for developing nations or precedential material defended with regulatory vigor remains to be seen. Regardless, taxpayers should consistently and deliberately review their transfer pricing documentation to ensure it is consistent with and appropriate given ongoing international tax initiatives.  

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