Worldwide: Transfer Pricing Times: The OECD Releases New Guidance For The Application Of The Transactional Profit Split Method

Last Updated: July 6 2018
Article by Mike Heimert, Jill Weise, Ted Keen and Douglas Fone

In this edition: The OECD has released final guidance on the appropriate application of the Transactional Profit Split Method and on implementing the approach to Hard to Value Intangibles; the ECJ found that a transfer pricing adjustment made under Germany's foreign tax act is compatible with EU legislation; Transactions being undertaken in association with U.S. tax reform bring focus to anti-churning rules of Internal Revenue Code § 197; New Zealand's Taxation Bill passed its second reading and will soon become law; the Australian Taxation Office extended the timelines for filing the Australian Local Files for Country-by-Country reporting for taxpayers; and the Australian Taxation Office's Deputy Commissioner spoke at the TP Minds Australia Conference where Duff & Phelps was the Co-Partner.

The OECD Releases New Guidance for the Application of the Transactional Profit Split Method

On June 21, 2018, the OECD released long-awaited final guidance on the appropriate application of the Transactional Profit Split ("TPS") Method and on Implementing the OECD's guidance on Hard to Value Intangibles ("HTVI"). Both pieces of guidance were issued in association with the OECD Base Erosion and Profit Shifting Project (or OECD BEPS Action Plan) that began in 2013 under Action Items 8-10. The OECD had issued several discussion drafts and held multiple public consultations on these matters over several years.

Profit Split
The last draft guidance issued on TPS Method came in July 2017, and this final guidance makes only minor modifications to that guidance.

There had been concerns that the BEPS project might yield guidance which vastly expanded potential applications of the TPS Method – a goal that was clearly being pursued by certain delegates and stakeholders over the course of the BEPS project. This was particularly the case when the first discussion draft related to the TPS Method came out in December of 2014.

The final guidance (which largely makes changes to TPS guidance in Chapter II) takes a considerably more measured approach to the application of the TPS Method than that early draft guidance, stressing that the TPS Method is likely to be most appropriate only when multiple parties make unique and valuable contributions, when business operations are highly integrated so that independent contribution evaluation cannot be meaningfully performed, and/or when multiple parties share the assumption of economically significant risks under the accurately delineated transaction. The final guidance makes clear that the use of external comparables (e.g., as in a comparable profit split approach under U.S. Treas. Reg. § 1.482-6 or the use of routine comparables) is still a valid approach where applicable and available, and the existence of reliable comparable data may make it unlikely that the Transactional Profit Split Method will be the most appropriate method. Furthermore, it stresses that the lack of comparables is not, in isolation, a sufficient condition for applying the TPS Method – a position that had been advocated by certain delegates.

Some of the factors that may yield appropriate TPS Method applications under this guidance (for instance a high level of business integration) may be interpreted differently by different parties and could yield an increase in tax disputes over the appropriate application of profit splits.

The final guidance on profit splits is available here.

The HTVI guidance aims to improve consistency and reduce the risk of economic double taxation by presenting the principles that should underlie the application of the HTVI approach by tax authorities. The HTVI approach refers, generally, to the consideration of information that becomes available after a transaction occurs (i.e. ex-post information) as presumptive evidence about the appropriateness of ex ante pricing arrangements for HTVI. Additionally, the revised guidance addresses the interaction between the HTVI approach and access to Mutual Agreement Procedure ("MAP") under the applicable tax treaty.

The HTVI approach as incorporated into Section D.4 of the OECD Transfer Pricing Guidelines was intended to protect tax authorities from the negative effects of asymmetric information available to them (relative to that available to taxpayers) associated with HTVI. Specifically, the HTVI guidance allows tax administrations to make adjustments to HTVI transaction consideration when the projected income or cash flows used in the original valuation differ significantly from the actual income or cash flows for, but only when certain conditions hold. Those conditions generally relate to the taxpayer's lack of appropriate consideration about what could reasonably be foreseen at the time of the transaction. As a general matter, much of the HTVI guidance hews closely to the U.S. guidance on commensurate-with-income ("CWI") adjustments discussed in U.S. Treas. Reg. § 1.482-4. This recently issued implementation guidance is meant to provide guidance about what should be done when the HTVI approach is applicable given the facts and circumstances. This guidance notes that it would be incorrect to base a revised valuation on the actual results (the approach generally prescribed under the U.S. regulations) without also taking into account the probability, at the time of the transaction, of the actual income or cash flows being achieved. The guidance offered in this final release is fairly broad and does not offer a prescriptive approach to making adjustments. Rather, it raises general principles that should be followed (for instance, consistency of application, refraining from automatic substitution of actual results, etc.) and offers a few examples.

The guidance also recommends that tax authorities apply audit practices that ensure HTVI transactions are identified and acted upon as soon as possible to evaluate the assumptions made by the taxpayer in valuing the intangible. To avoid double taxation and enhance tax certainty in HTVI transactions, the OECD made certain clarifications around Advance Pricing Arrangements ("APAs") and dispute resolution. In cases the transfer of a HTVI is covered by a bilateral or multilateral APA, the HTVI approach is not applicable. In the event that the HTVI approach leads to double taxation, the dispute should be resolved through access to the MAP under the applicable treaty.

This guidance has been incorporated into the OECD Transfer Pricing Guidelines as an annex to Chapter VI.

The final guidance on HTVI implementation is here.

ECJ Upholds Sec 1 of Germany's AstG Against Potential Freedom of Establishment Challenges

In a recent landmark judgement (Hornbach, C-382/16), the ECJ found that a transfer pricing adjustment made under Germany's foreign tax act (Außensteuergesetz, AStG), which only applies to cross-border transactions, is compatible with EU legislation, i.e. does not violate the freedom of establishment. The freedom of establishment allows businesses from any member state of the EU to conduct their business (including setting up subsidiaries) in any other member state without unjustified restrictions. Sec 1 AStG allows the German tax authorities to impose income adjustments on taxpayers if they find that their cross-border transactions with related parties are not conducted at arm's length, but only for cross-border cases. No similar adjustment mechanism would be imposed in certain domestic cases. One such cross-border case, concerning a guarantee given by a German parent to two Dutch subsidiaries at non-arm's length terms, has been brought before a German fiscal court, which in turn referred the case to the ECJ to answer the question whether Sec 1 AStG violates the freedom of establishment.

In line with its earlier jurisprudence (SGI, C-311/08), the ECJ held that Sec 1 AStG is, "[...] in principle a restriction on freedom of establishment, but that it pursues legitimate objectives concerning the need to maintain the balanced allocation of the power to tax between the Member States and that of preventing tax avoidance." However, according to the Court, it is also a requirement that Sec 1 AStG complies with the principle of proportionality. In order to be compliant with this principle (amongst other things), the tax payer must be given the opportunity to provide evidence of any commercial justification.

The ECJ stated that such "commercial justification" can also relate to the parent/subsidiary relationship of the parties involved. This creates some dichotomy, as commercial reasons generally are already being taken into account (as third parties would) when assessing the arm's length nature of an intercompany transaction. However, the ECJ now takes this one step further and explicitly allows "commercial reasons" that are due to the parent/subsidiary relationship to be brought forward in order to explain otherwise non-arm's length pricing. This could be positive for tax payers, as it gives them a potential argument to defend non-arm's length pricing but creates uncertainty in what may be accepted as commercial reasons.

The ECJ did not give any definitive ruling on the case at hand, as to whether the "commercial justification" brought forward by the tax payer is acceptable, and rather referred this question back to the referring Fiscal Court in Germany. This court will now be tasked with interpreting the ECJ judgment and rule over this question from a German perspective.

Overall, the upholding of Sec 1 AStG did not come as a surprise, and should probably be welcomed by taxpayers, given the obvious alternative that the legislation would otherwise very likely be amended to cover domestic transactions as well.

The Court's reasoning on the "commercial justification" may cause some complications in applying the arm's length principle. The Court mentioned not only commercial reasons in line with arm's length pricing which might occur between independent parties, but also justifications that might link to commercial reasons associated with the shareholding relationship (and therefore may result in accepting a non-arm's length transaction). Given that it is a ECJ judgement, it will not only affect German cases, but could potentially have an impact across the EU.

United States: Increased Focus on the Anti-Churning Rules of IRC Section 197

In response to U.S. tax reform implemented through the Tax Cuts and Jobs Act in December 2017, many companies have considered the impact of transferring intangible assets to the United States. One of the issues often involved in this consideration is the amortization treatment of the intangible assets potentially being transferred. This brings into play Internal Revenue Code ("IRC") § 197, which details the amortization deduction rules for many types of intangible assets.

Many taxpayers are increasingly focused on the anti-churning provisions contained in IRC § 197. Generally, these provisions identify intangible assets for which amortization deductions are not allowed and applies to intangible assets which existed prior to August 11, 1993. The specific intangible assets subject to the anti-churning rules of IRC § 197 are goodwill, going concern and other intangible assets such as trademarks and tradenames, which existed prior to August 11, 1993, but which were not amortizable in the context of an asset purchase pursuant to IRC § 1060 or an IRC § 338(h)(10) election. When transferring intangible assets to the United States, these "tainted" section 197 intangible assets must be identified and separated from other section 197 assets, as the tainted section 197 intangible assets will not receive amortization benefits.

The identification of these tainted section 197 intangible assets requires a detailed analysis of intangible assets that exist as of the time of the contemplated transfer and the connections between those intangibles and intangible assets (especially goodwill) in existence in 1993. Valuation techniques and methodologies need to be developed to value the tainted section 197 intangible assets, which can often be complex due to the need to separate the value of the tainted section 197 intangible assets from other intangible property. The outcome of this analysis is often of significant importance to decisions regarding the desirability and feasibility of such property transfers. The Transfer Pricing and Valuation professionals at Duff & Phelps have expertise in providing advice and analysis relating to the identification and valuation of tainted section 197 assets subject to the anti-churning rules. Those wishing to learn more about our offerings in these areas should contact the Duff & Phelps Transfer Pricing leadership team.

Revised Interest Limitation Rules in New Zealand

In May 2018, New Zealand's Taxation (Neutralizing Base Erosion and Profit Shifting) Bill passed its 'second reading' and will soon become law. The legislation applies to income years commencing on or after July 1, 2018 and will amend and/or introduce various provisions of the Income Tax Act 2007 (ITA) and the Tax Administration Act 1994 (TAA).

The Bill in particular includes:

  • New interest limitation rules;
  • New Permanent Establishment ("PE") rules;
  • Various amendments to the Transfer Pricing provisions;
  • New Hybrid and branch mismatch rules; and
  • Expanded access to offshore information provisions.

Perhaps the most controversial provisions concern new interest limitation rules for inbound finance transactions, which the Inland Revenue (IRD) is, in practice, seeking to also apply to outbound finance transactions even though not statutorily sanctioned.

The key elements include:

  • A 'stepped approach' for determining the applicable credit rating for purposes of establishing/reviewing the spread, leading to one of the following assigned credit ratings for the borrower's indebtedness:

    • Default credit rating – equivalent to the credit rating that the borrower has for long-term senior unsecured debt or, in the absence of such, the credit rating the borrower would have under an arm's length analysis. This default rating is applicable only if the other potential ratings are neither required nor elected; or
    • Restricted credit rating – the credit rating of a borrower that is controlled by either a non-resident co-ordinated group or a group acting in concert is equivalent to the higher of:

      • BBB-, or an equivalent rating assigned by a ratings agency;
      • the credit rating the borrower would have if its New Zealand Group had a debt percentage below 40%, or its actual debt percentage if below 40%; or
    • Group credit rating – the credit rating of a high BEPS-risk borrower is equivalent to the higher of:

      • the rating of the worldwide group member with the highest level of long-term senior unsecured debt, minus 1 notch (if below BBB+) or 2 notches (if BBB+ or above); or
      • the credit rating determined under an arm's length analysis for long-term senior unsecured debt; or
    • Optional credit rating – if elected, the credit rating of a borrower is equivalent to the rating on, or the rating corresponding to the interest rate on, existing long-term senior unsecured debt of the borrower or its New Zealand Group with third parties, applicable for up to four times the amount of related party debt.
  • An administrative safe harbour, with an interest rate cap, applies to indebtedness below NZD 10m. Also, a related-party loan with the same interest rate as the borrower's foreign parent will generally be accepted.
  • Terms and conditions ("exotic" features) that could result in an excessive interest rate are ignored for spread pricing purposes, such as payment in kind, interest payment deferral beyond 12 months, controllable interest rate or principal repayment contingency terms, tenors exceeding 5 years, and subordination, unless the taxpayer can demonstrate equivalent third-party debt featuring such terms and conditions, but subject to complex calculations.
  • Covered loans under APAs entered into before July 1, 2018 are 'grandfathered'; however, modifications thereto may alter this.

As noted, the Bill also includes various other provisions concerning the transfer pricing rules, PE avoidance, hybrid structures and administrative laws. These will be discussed in the July 2018 issue of the Duff & Phelps Transfer Pricing Times.

Australia: ATO extends CbC lodgment of Part A to September 14, 2018

The Australian Taxation Office ("ATO") has recently extended the timelines for filing the Australian Local Files for Country-by-Country ("CbC") reporting for taxpayers with year ended December 31, 2017 ("FY 2017") or later.

Originally, the CbC rules requires Australian taxpayers to submit a unique Local File to the ATO each year, and to ensure that ATO will have access to the Master File, either through local submission or the exchange of information framework. However, to avoid duplication in the disclosure of the intercompany transactions in Part A of the Local File and questions on the International Dealings Schedule (IDS), Australian taxpayers may choose to lodge Part A their Local File by the due date of the income tax return. However, the ATO has extended filing date of Part A lodgements to September 14, 2018 for purposes of enabling implementation and testing of software updates.

In the meantime, Australian taxpayers can choose to lodge other sections of the Local File (e.g. Part B and the Short Form) with Part A, or at some other time prior to the due date of the full Local File (12 months after the reporting year-end).

Australia: ATO at TP Minds Conference in Sydney

At the end of May 2018, Duff & Phelps co-sponsored the first Australian TP Minds Conference in Sydney. Among the speakers was the Australian Taxation Office's ("ATO") Deputy Commissioner, International Mr. Mark Konza. Mr. Konza's speech covered a wide-range of issues including the OECD's BEPS project and Australia's role in that project; the significance of risk and how the arm's length principle is evolving based on risk attribution; international cooperation and tax transparency including Australia's involvement in the OECD's International Compliance Assurance Program ("ICAP"); Australia's new BEPS-based anti-avoidance regimes that apply to Significant Global Entities, being the Multinational Anti-Avoidance Laws and Diverted Profits Tax; and the ATO's establishment of its Tax Avoidance Taskforce. He also discussed Australia's advanced pricing agreement program and its mutual agreement procedures. As part of this latter point, he discussed the acceptance by the ATO of arbitration for certain MAP matters starting on July 1, 2019.

In closing, Mr. Konza made the following statements, emphasizing the ATO's ongoing compliance program and warning taxpayers to play fair:

"The Australian Government and its tax office are committed to ensuring that multinational enterprises pay the correct amount of tax under the law. As I hope I have demonstrated, even within a period of rapid change, the Australian Taxation Office has continued to balance a strategy of cooperation with all those seeking to comply with the law and a resolute response to those seeking to not comply.

The transfer pricing landscape has had seismic shifts. Collectively their direction heads towards a transparent alignment of tax outcomes with value creation. For those MNEs who may previously have sought to game the system, there is increasing pressure to get on board and use real substance and real commercial drivers in making their pricing decisions. It is up to those MNEs and their advisers to get with those who have been doing the right thing all along and to get real."

A copy of the speech is available on the ATO's website here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions