Transfer Pricing: An Analysis of BEPS Project Impact of OECD's Pricing Methods

Diana Lindorf Børjesson

Student thesis: Master thesis

Abstract

The Political agenda has never been so focused on international tax matters and especially transfer pricing as it is today. The Danish Tax Authorities has increasing focus on the transfer pricing issues. Looking back at 2015 the Danish Tax Authorities conducted 142 transfer pricing controls, resulting in a total income increase of 5.9 billion. This shows that there is a need for extra focus on this area.
Due to the transfer pricing challenges, OECD has initiated the Base Erosion and Profit Shifting project. This is the most ambitious tax project in recent times.
This thesis examines the current guidance on transfer pricing of the OECD Transfer Pricing Guidelines 2010 with focus on the arm’s length principle, comparability analysis and OECD’s five pricing methods.
Subsequently the OECD BEPS Project will be analyzed, based on BEPS action points 9 and 10, and analyze the clarifications of TPG Chapter 1. These have led to changes in consideration on actual behavior, lack of recognition and realistic alternatives. Additionally, this thesis include an analysis of the new TPG Chapter 9, which deals with internal restructuring.
The thesis contain a fictitious case to be used to show the application of the arm's length pricippet using the revised OECD Transfer Pricing Guidelines. The fictional case relates to a Danish parent company with 3 subsidiaries abroad, which has a principal structure. The case contains an internal restructuring where all essential functions, assets and risks is transferred to two of the foreign subsidiaries. There is provided a function- and risk analysis of each of the companies before and after the restructuring, as well as evaluating the pricing method to be used.
The centralized model – principal structure - shows only limited risks and functions for each of the subsidiaries abroad, this leads to the use of TNMM net cost plus and TNMM EBIT.
The restructuring involves the transfer of essential functions, assets and risks to the subsidiaries abroad, which assigns them a larger share of the profit. The best transfer pricing method to distribute the profits among several value-creating companies is by using the Profit Split residual method. The routine transactions are remunerated as TNMM net cost plus and TNMM EBIT, while the rest of the profit or loss is allocated from the important functions that are unique and valuable, which each company will contribute.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2017
Number of pages82