Key Pillar Of The Beps Process Is To Align Profit With Value Creation

Author:Mr Joe Duffy

OECD guidance needs to be clear otherwise the process could favour the bigger nations.

In Paris last week, as Angela Merkel and Francois Hollande discussed events in Greece, the international tax system was being discussed in an underground meeting room at OECD headquarters. For almost two days tax authority delegates from more than 40 countries, including Ireland, met with more than 60 representatives from industry, advisors and NGOs.

The much-heralded G20 sponsored Base Erosion Profit Shifting, or Beps process, is due to conclude later this year. The purpose of the Paris meeting was to discuss the likely conclusions on transfer pricing. The final Beps reports are due to be released immediately prior to the G20 finance minister's meeting in Turkey on October 8th.

Of course the Beps reports will address many taxation concerns. One such concern is transfer pricing and the Cash Box Company. After almost two years' debate it seems that the days of the Cash Box Company are finally numbered.

The Cash Box Company is that entity that has attracted so much media and political ire in recent years; a capital rich entity, with no employees, very often tax resident in a sunny Caribbean island that doesn't levy a tax on profits. However the Cash Box Company may be hugely profitable and very often its only function is the provision of funding to group companies.

A key pillar of the Beps process is to align profit with value creation. So it seems that the OECD have concluded that if the Cash Box Company is not exercising control over the financial risk that is connected with the provision of the funding, then the risk, and the related profit, should be allocated to the group entity that is actually performing the control functions. The Cash Box Company would get no more than a risk free rate of return for providing the funding itself.

Critically, it seems the OECD has concluded that profit may be aligned with value creation in accordance with the arm's length standard. The arm's length standard is the long standing rule requiring intra-group transactions to be priced in the same way as unrelated party transactions. Detailed guidance will be published in the Beps reports later this year and the guidance will include a...

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