The OECD has released the 2022 edition of its TP guidelines

On Jan. 20, 2022, the Organisation for Economic Co-operation and Development (OECD) released its latest transfer pricing guidelines for multinational enterprises and tax administrations (the guidelines). The guidelines were initially approved and published by the OECD Council in 1995 and were subsequently updated in 1996 and 1997. Prior to the release of the 2022 edition, the last revisions made by the OECD to the guidelines were made in 2010 and 2017.

The 2022 edition of the guidelines reflect some agreed revisions based on the outcome of the OECD/G20’s 2015 Base Erosion and Profit Shifting (BEPS) project. It is believed that these revisions will provide taxpayers with greater certainty and align transfer pricing (TP) outcomes with value creation.

Summary of changes

Some of the changes reflected in the 2022 edition of the guidelines aimed at providing clearer guidance on the application of the arm’s length principle include:

Revised guidance – Application of the Transactional Profit Split Method

The revised guidance retains the basic premise that the profit split method should be applied where it is found to be the most appropriate method for the case at hand, but it significantly expands the guidance available to help determine when a profit split method may be the most appropriate method. It also provides sixteen examples to illustrate the principles discussed in the text and demonstrate how the method might be applied in practice. These will be included in Annex II to Chapter II of the guidelines.

New guidance – Application of the Approach to Hard-to-Value Intangibles (HTVI)

The new guidance for tax administrations on applying the HTVI approach aims to reach a shared understanding and practice among tax administrations on how to apply adjustments resulting from the application of the approach to HTVI. The guidance aims to improve consistency and reduce the risk of double economic taxation. In particular, the new guidance:

• Presents the principles that should underlie the application of the HTVI approach by tax administrations
• Provides several examples clarifying the application of the HTVI approach in different scenarios
• Addresses application of the HTVI approach and the mutual agreement procedure under an applicable tax treaty

The guidance for tax administration on applying the HTVI approach in this document has been incorporated into the 2022 edition of the OECD TP Guidelines as Annex II to Chapter VI.

New guidance – Financial Transactions

This report contains TP guidance on financial transactions, developed as part of Actions 4, 8–10 of the BEPS Action Plan. The guidance describes the TP aspects of financial transactions and includes several examples to illustrate the principles discussed in this report.

The 2020 guidance, which aimed to consistently interpret the arm’s length principle and help avoid TP disputes and double taxation, has been incorporated in the 2022 edition of the OECD TP guidelines. Sections A to E of this report I has been incorporated into Chapter I (new Section D.1.2.2) and in a new Chapter X of the guidelines.

Takeaway

Considering that the U.S. TP regulations are applied in a manner consistent with the guidelines, as may be updated from time to time, the above-mentioned revisions are of immediate importance to both U.S. taxpayers and tax practitioners.

Revisions to the guidance on documentation would prioritize preparing robust TP documentation to substantiate the arm’s length nature of related party transactions, for example:

• Multinational enterprises (MNEs) will need to document the business rationale appropriately for entering financial transactions and provide a background on their decision to advance funds in the form of debt instead of equity.
• Documenting the substance of financial transactions has become even more critical.
• A TP analysis of financial activities would have to demonstrate the borrower’s ability to repay the loan, and document that the terms and conditions are arm’s length. Further, taxpayers must document other options realistically available from the lender's and borrower’s perspectives.

The guidance will also clarify the content of a “standard” TP documentation package. In addition, recommendations emphasizing substance over legal ownership of intangibles could require taxpayers to re-evaluate the remuneration allocated to counterparties based on their economic contributions.

Finally, the release of the revised guidelines makes it critical for U.S. taxpayers to reassess their TP practices to ensure full compliance with best practices and regulations.