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Table of contents


AlixPartners LLP 19

AOTCA (Asia Oceania Tax Consultants' Association) 25

Association of Banks in Singapore (ABS) 27

BDI 29 BDO 31 BEPS Monitoring Group 37 BIAC 58 Brose Fahrzeugteile GmbH & Co KG 68 BUSINESSEUROPE 75 Canadian Bankers Association 85 CBI 88 Centrum Cen Transferowych (CCT) 95 China International Tax Center - IFA China 100 CLHIA (Canadian Life and Health Insurance Association) 103 Confederation of Indian Industry (CII) 105 Confederation of Swedish Enterprise 113 Deloitte LLP (UK) 120 Deloitte 133 DRTP Consulting 161 Duff and Phelps 172 Economics Partners LLC 177 EY 200 FCA (Fiat Chrysler Automobiles) 209 Frank Schoeneborn 217 Gazprom Marketing and Trading Ltd 221 Grant Thornton International Ltd 223 IAPT 233 ICC 252 ICI Global 255 IFA Grupo Mexicano 260 IHG 264 Irish Tax Institute 268 JFTC 276 Johan H Müller 282 Keidanren 285 KPMG 289 Macfarlanes LLP 301 MEDEF 308 NERA 312 NFTC 319 Oddleif Torvik 327 PwC 350 Rahul K Mitra and Nishant Saini 361 Reed Elsevier 363 Richter 366 Roeve

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6 February 2015 By email to: transferpricing@oecd.org Andrew Hickman Head of Transfer Pricing Unit Centre for Tax Policy and Administration OECD Dear Andrew, BEPS Actions 8, 9 and 10: Discussion draft on revisions to chapter 1 of the transfer pricing guidelines (including risk, recharacterisation and special measures) BEPS Action 10: Discussion draft on the use of profit splits in the context of global value chains AFME 1 and the BBA 2 welcome the opportunity to respond to the OECD’s discussion General comments drafts entitled “BEPS Actions 8, 9 and 10: Discussion draft on revisions to chapter 1 of the transfer pricing guidelines (including risk, recharacterisation and special measures)” and “BEPS Action 10: Discussion draft on the use of profit splits in the context of global value chains”.

The Association for Financial Markets in Europe (AFME) represents a broad range of European and global participants in the wholesale financial markets. Its members comprise pan-EU and global banks as well as key regional banks and other financial institutions. AFME advocates stable, competitive and sustainable European financial markets, which support economic growth and benefit society.

The BBA is the leading trade association for the UK banking sector with more than 200 member banks headquartered in over 50 countries with operations in 180 jurisdictions worldwide. Our associate membership includes over 80 of the world’s leading financial and professional services organisations.

We wish to make clear that while AFME and the BBA have separate and distinct memberships, both organisations have decided to submit a single, combined response since our respective members share the same concerns with the OECD’s proposals in the discussion drafts.

We welcome that the OECD is consulting with business on its proposals. We believe that this approach is to the benefit of both policymakers and business and helps to avoid any unintended consequences arising from the OECD’s initial proposals. We believe that it is also valuable for the OECD to take account of the views of business on the practical aspects of operating the intended policy.

The relatively short time available to consider the discussion drafts – and the large number of other OECD discussion drafts recently open for consultation with short deadlines – poses a challenge for all businesses and the OECD secretariat. Should it be of assistance we would be pleased to meet with the OECD Secretariat to discuss these matters in greater detail or provide further information upon request.

BEPS Actions 8, 9 and 10: Discussion draft on revisions to chapter 1 of the transfer pricing guidelines (including risk, recharacterisation and special measures) (the discussion draft) The importance of regulatory capital and existing transfer pricing guidelines for banking and finance groups We note that the banking and financial services industry is subject to regulatory requirements, in particular with regard to capital, liquidity and leverage. We welcome the recognition in the discussion draft that the evolving regulatory environment in which banks and other financial institutions operate substantively differentiates them from other sectors for the purposes of action items 8 to 10.

Supervisory authorities have sought to ensure that the regulatory framework promotes financial stability, protects deposit holders and ensures the continuity of services to customers and businesses, in particular lending throughout the business cycle. This means that banks and other financial institutions are required to hold increased capital reserves against their assets and face limits on their ability to leverage. Critically, this also limits the ability of banks and other financial institutions to engage in activity which may cause concern in relation to BEPS.

The OECD has recently considered thoroughly the allocation of risk and capital within banking and financial services groups in developing the 22 July 2010 “Report on the attribution of profits to permanent establishments” (the 2010 report). We note that this report recognises the importance of Key Entrepreneurial Risk Taking (KERT) functions in a bank or financial institution (i.e., the creation of financial assets and management of the risk associated with those assets). We believe that the 2010 report is widely regarded by both tax authorities and taxpayers as a reasonable and fair approach to taxing banking and finance businesses.

We would welcome clear recognition of the relevance of the 2010 report for the banking and financial services sector, and acknowledgement that it is consistent with the general approach outlined in the proposed revised Chapter 1, Section D of the Transfer Pricing Guidelines.

Identifying commercial or financial relations

We note that Part D.1 of the discussion draft provides new guidance for identifying the commercial and financial relations between associated enterprises. In particular, Paragraph 2 of the discussion draft states that the “process of identifying the commercial or financial relations between associated enterprises follows from examining contractual terms governing those relations together with the conduct of the parties. Establishing the conduct of the parties involves examination of all of the facts and circumstances surrounding how those enterprises interact with one another in their economic and commercial context to generate potential commercial value, how that interaction contributes to the rest of the value chain, and what the interaction involves in terms of the precise identification of the functions each party actually performs, the assets each party actually employs, and the risks each party actually assumes and manages.” Whilst we believe that the process of identifying the commercial or financial relations between associated enterprises should focus on the conduct of the parties in addition to the contractual terms, we are concerned about a potential lack of consistency regarding the extent to which jurisdictions may take into consideration the conduct of the parties.

We therefore welcome that Paragraphs 4 and 6 of the discussion draft include some examples suggesting how the conduct of the parties would be taken into account by tax authorities and we would encourage the OECD to include more examples. We would be happy to work with the OECD in due course in this regard.

As noted above, we would recommend acknowledgement of the established approach for banks and financial services. For the banking and financial services sector, we also recommend that the OECD guidance takes into account and stresses the importance of regulation as it affects both the contractual terms and conduct of the parties. The role of KERTs is directly relevant in this context and should be referred to in the OECD guidance.

Financial capacity to bear risk

We note that Paragraph 66 of the discussion draft provides that “Financial capacity to bear risk is a relevant but not determinative factor in considering whether a controlled party should be allocated a risk return. As stated in Chapter IX [of the July 2010 OECD transfer pricing guidelines], a high level of capitalisation by itself does not mean that the highly capitalised party carries risk (Paragraph 9.32). MNE groups, unless subject to capital adequacy regulations, can determine the capital structure of subsidiaries without explicit consideration of actual risk in that subsidiary.” We note that Paragraph 66 of the discussion draft goes on to state that “For the same reason, a low level of capital in a controlled enterprise, should not prevent the allocation of risk to the company for transfer pricing purposes where such allocation is justified under the guidance of this Chapter”.

Again, we would note that the role of risk and capital has already been considered for the banking and financial services sector in the 2010 report. We believe that it would be helpful to cross refer to this work when developing any further proposals, in particular the interaction of the ability to assume risk and capital and the role of KERTs.


We note that Paragraphs 83 to 93 of the discussion draft consider the issue of “nonrecognition”, where transactions can be disregarded or recharacterised for transfer pricing purposes because the transactions do not have arm’s length attributes.

Paragraph 86 of the discussion draft - in relation to the reason for the need for “nonrecognition” – states that “except in certain regulated sectors, MNE groups have freedom to control their structures, including shareholding, capitalisation, and legal form.” We note that regulated banking and financial services groups do not have the freedom to structure their arrangements in the ways described in Paragraphs 85 to 87 as non-banking and financial services groups and we believe that this should be acknowledged explicitly in the guidance.

We note that Paragraph 93 of the discussion draft sets out the consequences of “nonrecognition”. In particular, that the taxpayer’s structure may be replaced by an alternative structure that reflects the “fundamental economic attributes of arrangements between unrelated parties and that comports as closely as possible with the commercial reality of independent parties in similar circumstances”. We recommend that the OECD provides further guidance setting out how the alternative structure should be determined.

Special measures

Part 2 of the discussion draft presents five options for potential special measures to ensure that transfer pricing outcomes are in line with value creation. For options 2 to 5, the special measures seek to address issues arising from the “freedom that MNE groups have (except in certain regulated sectors) to control their structures, including the creation and capitalisation of companies”.

We think that it is correct to recognise that that the regulated environment for banks and financial services protects against such transactions, as we have briefly outlined in this consultation response. The further commentary on these aspects included in the AFME/BBA response on 6 February 2015 (attached for reference at Appendix 1) to the OECD’s 18 December 2014 discussion draft entitled “BEPS Action 4: Interest deduction and other financial payments” is also relevant.

For the reasons set out above, we suggest that if any of the options for special measures are developed further, care should be taken to ensure that they appropriately address the banking and financial services sector in a manner consistent with regulation and the 2010 report. In that regard, we believe that any general measure needs to take care not to cut across regulatory measures designed to promote financial stability and protect deposit holders.

We believe that any special measure should only be considered following the normal application of transfer pricing rules, which may well render the special measure unnecessary. We believe that the intention is for any special measure relating to capital to deal with a limited number of abusive situations and we would welcome this being explicitly stated. Any special measure which has a wider application is likely to also need a mechanism for eliminating double taxation. Our comments on the need for a corresponding adjustment included in the AFME/BBA response on 6 February 2015 (see Appendix 1) to the OECD’s 18 December 2014 discussion draft entitled “BEPS Action 4: Interest deduction and other financial payments” are relevant in this regard.

Paragraph 5 of Part 2 of the discussion draft acknowledges that “the situations addressed in this section have a close interaction with other actions under the BEPS action plan, including Action 3 on strengthening CFC rules and Action 4 on interest deductions”. We agree with that, and consider that measures to address overcapitalisation seem most naturally to be part of a CFC regime. If any of these options are developed further, future proposals will need to be coordinated with those developed under action items 3 (strengthening the CFC rules) and 4 (interest deductibility) to ensure that there are no duplicative special measures.

Consistency and dispute resolution procedures

We note that if the OECD does go ahead and develop the proposals associated with “non-recognition”, the “special measures”, or the focusing on the conduct between the parties with respect to identifying commercial or financial relations, it would be important to ensure that all jurisdictions adopt the proposals on a consistent basis to avoid double taxation and potential disputes between tax authorities. We would therefore encourage the OECD to provide as much clarity and guidance as possible. We would also stress the need for the development of appropriate dispute resolution mechanisms, currently being developed by the OECD under action item 14.

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