TRANSFER PRICING: WHAT HAS CHANGED IN OECD’S 2017 GUIDELINES? [PART 1]

Transfer prices are
significant for both taxpayers and tax administrations because they determine
in large part the income and expense and therefore taxable profits of
associated enterprises in different tax jurisdictions. With a view to minimise
the risk of double taxation and achieve international consensus on
determination of transfer prices on cross-border transactions, OECD¹  from time to time provides guidance in
relation to various transfer pricing issues.

In 2015, the OECD
came out with its Reports on the 15 Action items agreed as a part of the BEPS²  agenda. These include Actions 8-10 (Aligning
Transfer Pricing Outcomes with Value Creation), Action 13 (Transfer Pricing
Documentation and Country by Country Reporting), and Action 14 (Making Dispute
Resolution Mechanisms More Effective). With a view to reflect the
clarifications and revisions agreed in 2015 BEPS Action Reports, the Transfer
Pricing guidelines were substantially revised and new Guidelines were issued in
2017 (2017 Guidelines).

This Article summarises the key additions
/ modifications made in the 2017 Guidelines (600
plus Pages) as compared to the earlier Guidelines.

These additions / modifications provide important new guidance to practically
look at different aspects of transfer pricing. From the perspective of the
taxpayers as well as tax practitioners, it is important to understand and
implement the new guidance to undertake, conceptually, a globally acceptable
transfer pricing analysis.

The first part
of the article deals with general guidance contained in Chapters 1 to 5 of the
2017 Guidelines. The second part of the article will deal with guidance
relating to specific transactions – Intangibles, Intra-Group Services, Cost
Contribution Agreements, and Business Restructuring.

This part of the
article summarises the following key changes in the 2017 Guidelines vis-à-vis
earlier guidelines:

1.   Comparability Analysis

•     Guidance on accurate delineation of
transactions between associated enterprises

•     Functional analysis (including,
specifically, risk analysis) based on decision-making capabilities and
performance of decision-making functions

•     Recognition / de-recognition of accurately
delineated transactions

•     Additional comparability factors which may
warrant comparability adjustments

2.   Application of CUP Method for analysing
transactions in commodities

3.   New guidance on transfer pricing
documentation (three-layered documentation)

4.   Administrative approaches to avoiding and
resolving transfer pricing disputes 

Each of the above
aspects have been discussed in detail in subsequent paragraphs.

1.   Comparability Analysis

The OECD Transfer
Pricing Guidelines advocate the arm’s length principle to determine transfer
prices between associated enterprises for tax purposes and consider
“Comparability Analysis” at the heart of the application of arm’s
length principle. The 2017 Guidelines provide detailed guidance on certain
aspects discussed below.

1.1 Accurate delineation of transactions as the starting point for
comparability analysis

The 2017 Guidelines
provide two key steps in comparability analysis: 

• Identification of
  commercial or financial relations between associated enterprises and conditions
  and economically relevant circumstances attaching to those relations in order
  that the controlled transaction is accurately delineated;

• Comparison of the
  conditions and economically relevant circumstances of the controlled
  transaction as accurately delineated with the conditions and the economically
  relevant circumstances of comparable transactions between independent
  enterprises.

______________________________________________________________

1   Organisation
for Economic Cooperation and Development

2   Base
Erosion and Profit Shifting

The 2017 Guidelines provide that the controlled transaction should be
accurately delineated. Further, for the purpose of accurate delineation of the
actual transaction(s) between associated enterprises, one needs to analyse the
commercial or financial relations between the parties and economically relevant
circumstances surrounding such relations. The process starts with a broad
understanding of the industry in which the MNE group operates, derived by an
understanding of the environment in which the MNE group operates and how it
responds to the environment, along with a detailed factual and functional
analysis of the MNE group. This information is likely to be documented in the
Master File of the MNE group. The process then narrows to identify how each entity
within the MNE group operates and provides analysis of what each entity does
and its commercial or financial relations with its associated enterprises.

This accurate
delineation is crucial since the application of the arm’s length principle
depends on determining the conditions that independent parties would have
agreed in comparable transactions in comparable circumstances. For applying the
arm’s length principle, it is not only the nature of goods or services
transacted or the consideration involved that is relevant; it is imperative for
taxpayers and practitioners to accurately delineate the underlying
characteristics of the relationship between the parties as expressed in the
controlled transaction. 

The economically
relevant characteristics or comparability factors that need to be identified in
order to accurately delineate the actual transaction can be broadly categorised
as:

• Contractual
  terms

• Functional analysis

• Characteristics of property
  or services

• Economic circumstances,

• Business strategies.

Information about these economically relevant characteristics is expected to be
documented in the local file of the taxpayer involved³.

__________________________

3   Refer
para 1.36 of 2017 Guidelines

1.2  Functional Analysis (Primarily, Risk Analysis)

The 2017 Guidelines
provide a detailed discussion on functional analysis, specifically on risk
analysis, as compared to earlier guidelines.

The focus of the
Guidelines with respect to functional analysis is on the actual conduct of the
parties, and their capabilities – including decision making about business
strategy and risks. The Guidelines also clarify that in a functional analysis,
the economic significance of the functions are important rather than the mere
number of functions performed by the parties to the transaction.

The 2017 Guidelines
provide detailed guidance on risks analysis as a part of functional analysis.
This is especially because the 2017 Guidelines have recognised the practical
difficulties presented by risks – risks in a transaction tend to be harder to
identify, and determination of the associated enterprise which bears the risk
can require careful analysis. 

The Guidelines
stress on the need to identify risks relevant to a transfer pricing analysis
with specificity. The Guidelines provide for a 6-step process for analysing
risk in a controlled transaction, in order to accurately delineate the actual
transaction in respect to that risk. The process is outlined below:⁴

^{_______________________________________}

4   Refer
Para 1.60 of 2017 Guidelines

It is expected that
going forward, functional analysis in any transfer pricing evaluation will
specifically focus on the above framework to analyse risks.

A detailed
understanding of the risk management functions is necessary for a risk
analysis. Risk management comprises three elements:⁵

• he capability to make
  decisions to take on, lay off, or decline a risk bearing opportunity, together
  with the actual performance of that decision-making function

• The capability to make decisions
  on whether and how to respond to the risk associated with the opportunity,
  together with the actual performance of that decision-making function

• The capability to mitigate
  risk, that is the capability to take measures that affect risk outcomes, together
  with the actual performance of such risk mitigation

The 2017 Guidelines
provide that the party assuming risk should exercise control over the risk and
also have the financial capacity to assume the risk. Control over risk involves
the first two elements of risk management relating to accepting or declining a
risk bearing opportunity, and responding to the risk bearing opportunity. In a
case where the third element, risk mitigation, is outsourced, control over the
risk would require capability to determine the objectives of the outsourced
activities, decision to hire risk mitigation service provider, assessment of
whether mitigation objectives are adequately met, decision on adapting or
terminating the services of the outsourced service provider etc. Financial
capability to assume the risk refers to access to funding required with respect
to the risk and to bear the consequences of the risk if the risk materialises.
Access to funding also takes into account the available assets and the options
realistically available to access additional liquidity, if needed.

As can be seen, the guidance gives weightage to decision-making
capability and actual performance of decision-making functions. The Guidelines
provide that decision makers should be competent and experienced in the area
which needs a decision regarding risks. They should also understand the impact
of their decisions on the business. Decision making needs to be in substance
and not just form. For instance, mere formalising of the outcome of
decision-making in the form of, say, minutes of board meetings and formal
signatures on documents would not normally qualify as exercise of decision
making function and would not be sufficient to demonstrate control over risks.
It is pertinent that these aspects are considered in particular when
undertaking a functional analysis – to identify the ‘control’ over decision
making of a particular function, rather than going by mere contractual terms or
other similar documents that evidence the ‘performance’ of the function.

________________________

5   Refer
Para 1.61 of 2017 Guidelines 

The implication of
this detailed new guidance on functional analysis is that a party which under
these steps does not assume the risk, nor contributes to the control of the
risk will not be entitled to unanticipated profits / losses arising from that
risk.

The following
example illustrates application of 6 step process outlined in the 2017
guidelines in the context of risk analysis:⁶

____________________________-

6   Refer
Example 1 (Para 1.83) of the 2017 Guidelines

Company A seeks to
pursue a development opportunity and hires a specialist company, Company B to
perform part of the research on its behalf. Company A makes a number of
relevant decisions about whether and how to take on the development risk.
Company B has no capability to evaluate the development risk and does not make decisions
about Company A’s activities.

• Step 1– Development risk is
  identified as economically significant risk

• Step 2–Company A assumes
  contractual development risk

• Step 3–Functional analysis
  shows that Company A has capability and exercises authority in making decisions
  about the development risk. Company B reports back to Company A at
  pre-determined milestones and Company A assesses the progress of development
  and whether its ongoing objectives are being met. Company A has the financial
  capacity to assume the risk. Company B’s risk is mainly to ensure it performs
  the research activities competently and it exercises its capability and
  authority to control that risk through decision-making about the specifics of
  the research undertaken – process, expertise, assets etc. However, this risk is
  distinct from the development risk in the hands of Company A as identified in
  Step 1.

• Step 4–Company A and B
  fulfil the obligations reflected in the contracts and exercise control over the
  respective risks that they assume in the transaction, supported by financial
  capacity.

• Step 5–Since the conditions
  specified in Step 4 are satisfied, Step 5 will not be applicable i.e. there is
  no requirement of re-allocation of risk.

• Step 6–Company A assumes and
  controls development risk and therefore should bear the financial consequences
  of failure and enjoy financial consequences of success of the development
  opportunity. Company B should be appropriately rewarded for the carrying out of
  its development services, incorporating the risk that it fails to do so
  competently.

1.3  Recognition / De-recognition of accurately
delineated transaction

As discussed
earlier, one needs to identify the substance of the commercial or financial
relations between the parties and the actual transaction will have to be
accurately delineated by analysing the economically relevant characteristics.
For the purpose of this analysis, the 2017 Guidelines provide that in cases
where the economically significant characteristics of the transaction are inconsistent
with the written contract, the actual transaction will have to be delineated in
accordance with the characteristics of the transaction reflected in the actual
conduct of the parties.

The 2017 Guidelines
also provide for circumstances in which the transaction between the parties as
accurately delineated can be disregarded for transfer pricing purposes. Where
the actual transaction possesses the commercial rationality of arrangements
that would be agreed between unrelated parties under comparable economic
circumstances, such transactions must be respected even where such transactions
cannot be observed between independent parties. However, where the transaction
is commercially irrational, the transaction may be de-recognised.

1.4 Additional comparability factors which may
warrant comparability adjustments

While the
Guidelines discuss about the impact of losses, use of custom valuation, effect
of government policies in transfer pricing analysis, the 2017 Guidelines also
provide for some additional comparability factors that may warrant
comparability adjustments. In the past, in the absence of clear guidance by the
OECD, some of these factors (such as location savings) have led to litigation,
where the tax authorities have insisted on a separate compensation for the
existence of these factors, whereas, taxpayers have claimed these to be merely
comparability factors not necessitating any transfer pricing adjustments per
se. These factors are:

• Location Savings:
  The Guidelines provide the following considerations for transfer pricing
  analysis of location savings: i) whether location savings exist; ii) the amount
  of location savings; iii) the extent to which location savings are retained by
  an MNE group member, or passed on to customers or suppliers; iv) manner in
  which independent parties would allocate retained location savings.

• Other Local Market
  Features: These factors refer to other market features such as
  characteristics of the market, purchasing power and product preferences of
  households in the market, whether the market is expanding or contracting,
  degree of competition in the market and other similar factors. These market
  factors may create advantages or disadvantages, and appropriate comparability
  adjustments should be made to account for these advantages or
  disadvantages. 

• Assembled workforce:
  The existence of a uniquely qualified or experienced employee group may affect
  the arm’s length price of services provided by the group of the efficiency with
  which services are provided or goods produced. In some other cases, assembled
  workforce may create liabilities. Existence of an assembled workforce may
  warrant comparability adjustments. Depending upon precise facts of the case,
  similar adjustments may be warranted in case of transfer of an assembled
  workforce from one associated enterprise to another.

• MNE group synergies: Group
  synergies may be positive or negative. Positive synergies may arise as a result
  of combined purchasing power or economies of scale, integrated computer or
  communication systems, integrated management, elimination of duplication,
  increased borrowing capacity, etc. Negative synergies may be a result of
  increased bureaucratic barriers, inefficient computer or networking systems
  etc. Where such synergies are not a result of deliberate concerted group
  actions, appropriate comparability adjustments may be warranted. However, when
  such synergies are a result of concerted actions, only comparability
  adjustments may not be adequate. In such situations, from a transfer pricing
  perspective, it is necessary to determine: i) the nature of advantage or
  disadvantage arising from the concerted action; ii) the amount of the benefit /
  detriment; iii) how should the benefit or detriment be divided amongst the
  group members (generally, in proportion to their contribution to the creation
  of the synergy under consideration).

2. Application of CUP Method for analysing
transactions in commodities

The OECD Guidelines
provide that the selection of a transfer pricing method should always aim at
finding the most appropriate method for a particular case. The guidance
provides description of traditional transaction methods and transactional
profit methods. The 2017 Guidelines provide additional guidance in the context
of CUP method.

The 2017 Guidelines
provide that that CUP method would generally be an appropriate transfer pricing
method (subject to other factors) for establishing the arm’s length price for
the transfer of commodities between associated enterprises. The reference to
“commodities” shall be understood to encompass physical products for
which a quoted price is used as a reference by independent parties in the
industry to set prices in uncontrolled transactions. The term “quoted
price” refers to the price of the commodity in the relevant period
obtained in an international or domestic commodity exchange market. Quoted
price also includes prices obtained from recognised and transparent price
reporting or statistical agencies or from government price setting agencies,
where such indexes are used as a reference by unrelated parties to determine
prices in transactions between them.

Such quoted price
should be widely and routinely used in the ordinary course of business in the
industry to negotiate prices for comparable uncontrolled transactions.

Further, the
economically relevant characteristics of the transactions or arrangements
represented by the quoted price should be comparable. These characteristics
include physical features and quality of the commodity; as well as contractual
terms of the transaction such as volumes traded, period of arrangements, timing
and terms of delivery, transportation, insurance and currency terms. If such
characteristics are different between the quoted price and the controlled
transaction, reasonably accurate adjustments ought to be carried out to make
these characteristics comparable.  

The Guidelines also
provide that the pricing date is an important element for making a reference to
the quoted price. Depending on the commodity involved, the pricing date could
refer to specific time, date or time period selected by parties to determine
the price of the commodity transactions. The price agreed at the pricing date
may be evidenced by relevant documents such as proposals and acceptances,
contracts, or other relevant documents. The Guidelines place the onus on the
taxpayer to maintain and provide reliable evidence of the pricing date agreed
by the associated enterprises. If reliable evidence is provided and it is
aligned with the conduct of the parties, the tax authorities should ordinarily
base their examination with reference to the pricing date. Otherwise, the tax
authorities may deem the pricing date based on documents available with them
(say, date of shipment as evident from the bill of lading).

Illustration:

An illustration of
how this guidance relating to the relevance of the pricing date is relevant, is
provided below. 

Assume the case of a commodity the price of which fluctuates on a daily
basis. The commodity is available in the spot market. In some cases, the prices
are also agreed for a future date / period for future deliveries. A taxpayer in
India (ICo.) imports the commodity from its AEs, at prices agreed two months in
advance. For the sake of this example, assume that the future prices of the
commodity tend to be same / similar as the spot prices (with the possibility of
a small future premium of up to 0.10% in some cases). ICo also imports certain
quantities of the commodity on a spot basis from third parties – in order to
take advantage of a potential favourable price movement.

Some of the dates of transactions entered into by ICo, and the
corresponding prices are provided in the table below, along with comparable
uncontrolled prices for the exact same dates.

From a plain
reading of this table, which represents the approach of comparing the prices as
at the transaction date, it would appear that the import prices are at arm’s
length for the three purchases made in June 2017, December 2017 and March 2018.
However, for the purchases made in September, 2017, there is a comparable
transaction available with a lower price. Accordingly, it appears that a
transfer pricing adjustment for the difference (INR 10,600 – INR 10,300 = INR
300 per unit) is warranted in the instant case. In fact, based on similar data,
there could be a potential transfer pricing adjustment in the hands of the AE
of ICo for the months of June 2017, December 2017 and March 2018⁷.
Clearly, the above analysis does not represent the commercial reality of the
transactions – that the pricing of the transactions with the AE has been
decided much before the transaction has been entered into, and under the CUP
Method, the same cannot be compared with the spot prices paid for third party
imports.

_________________________________________

7   For
the purpose of this analysis, it is assumed that all relevant comparability
criteria for application of CUP Method are satisfied.

However, if ICo is
able to provide evidence of the dates on which the prices have been agreed with
its overseas AE, data pertaining to such dates may be considered even if there
is no comparable uncontrolled transaction entered into by ICo during such
dates. Now consider the additional evidence provided by ICo in the following
table (see highlighted columns).

As can be seen from
the table above, the transaction prices appear more closely aligned with the
quoted prices as at the PO date. These prices are, in fact, better indicators
of the real market scenario – since in the real world, in case prices are
determined in advance of the transaction taking place, the parties do not have
the benefit of hindsight, and would consider the prevailing quoted prices to
arrive at their transfer prices. ICo and the AE would yet need to demonstrate,
in their respective jurisdictions, that the difference between the quoted price
and the transaction price is representative of the arm’s length future premium,
however, this explanation should be a lot easier and involve far lesser tax
risk than starting from a relatively inaccurate starting point –prices agreed
at a different date.

It is important for
the tax teams of MNEs to ensure that the procurement or sales teams (depending
on the nature of the transaction) document the correct period at which the
price was agreed (date or time, as the case may be – and depending on the
volatility of the price of the quoted product), and maintain evidence of the
quoted price of the commodity at the same period.

There appears to be
a direct correlation between the frequency and quantum of fluctuations in the
commodity prices, with the accuracy of the period of price setting that needs
to be evidenced.

3.   New guidance on transfer pricing
documentation (three-tiered documentation)

The 2017 Guidelines
outline transfer pricing documentation rules with an overarching consideration
to balance the usefulness of the data to tax administration for transfer
pricing risk assessment and other purposes with any increased compliance
burdens placed on taxpayers. The purpose is also to ensure that transfer
pricing compliance is more straightforward and more consistent amongst
countries⁸.

Briefly, the three
fold objectives of transfer pricing documentation as outlined in 2017
Guidelines are (a) ensuring taxpayer’s assessment of its compliance with the
arm’s length principle (b) effective risk identification (c) provision of
useful information to tax administrations for thorough transfer pricing audit.

The 2017 Guidelines
suggest a three-tiered approach to transfer pricing documentation and insist on
countries adopting a standardised approach to transfer pricing documentation.
The elements of the suggested three-tiered documentation structure are
discussed below.

• Master File – Master
  File is intended to provide a high level overview to place MNE group’s transfer
  pricing practices in their global economic, legal, financial and tax context.
  The information required in the Master File provides a blueprint of MNE group
  and contains relevant information that can be grouped in 5 categories (a) MNE
  group’s organisational structure (b) a description of MNE’s business or
  businesses (c) MNE’s intangibles (d) MNE’s intercompany financial activities
  and (e) MNE’s financial and tax positions⁹. The Guidelines are not
  rigid in prescribing the level of details which need to be provided as a part
  of the Master File, and require that taxpayers should use prudent business
  judgment in determining the appropriate level of detail for the information
  supplied, keeping in mind the objective of the Master File to provide a high
  level overview of the MNE’s global operations and policies. 

_____________________________________

8   The earlier guidelines emphasised on the
greater level of co-operation between tax administrations and taxpayers in
addressing documentation issues. Those guidelines did not provide for a list of
documents to be included in transfer pricing documentation package nor did they
provide clear guidance with respect to link between process for documenting
transfer pricing, the administration of penalties and the burden of proof.

9   Refer
Para 5.19 of 2017 Guidelines

• Local File – Local
  file provides more detailed information relating to specific inter-company
  transaction. The information required in local file supplements the master file
  and helps to meet the objective of assuring that the taxpayer has complied with
  the arm’s length principle in its material transfer pricing positions affecting
  a specific jurisdiction. Information in the local file would include financial
  information regarding transactions with associated enterprises, a comparability
  analysis, and selection and application of the most appropriate method.

• Country by Country
  Reporting (CbCR) – The CbCR requires aggregate tax jurisdiction wide
  information relating to the global allocation of the income, the taxes paid and
  certain indicators of the location of economic activity among tax jurisdictions
  in which the MNE group operates¹⁰. The Guidelines provide that CbCR
  will be helpful for high level transfer pricing risk assessment purposes, for
  evaluating other BEPS related risk (non-transfer pricing risks), and where
  appropriate, for economic and statistical analysis¹¹. The Guidelines
  provide that the CbCR should not be used as a substitute for a detailed
  transfer pricing analysis based on a full functional analysis and comparability
  analysis; and should also not be used by tax authorities to propose transfer
  pricing adjustments based on a global formulary apportionment of income.

The Guidelines
provide (as agreed by countries participating in the BEPS Project) for the
following conditions underpinning the obtaining and the use of the CbCR:¹²

•     Legal protection of the confidentiality of
the reported information

•     Consistency with the template agreed under
the BEPS Project and provided as part of the Guidelines

•     Appropriate use of the reported information
– for purposes highlighted above

Further, the 2017
Guidelines provide for ultimate parent entity of an MNE group to file CbCR in
its jurisdiction of residence and implementing arrangements by countries for
the automatic exchange of CbCR. The participating jurisdictions of the BEPS
project are encouraged to expand the coverage of their international agreements
for exchange of information.

Practically, this
three – tiered documentation is one of the most important transfer pricing
exercise which taxpayers and tax practitioners have been engaged in, over the
past more than a year– in aligning the three sets of documents, and ensuring
they provide consistent information. 

______________________________________________-

10  The 2017 Guidelines recommend an exemption
for CbCR filing for MNE groups with annual consolidated group revenue in the
immediately preceding fiscal year of less than EUR 750 million or a near
equivalent amount in domestic currency as of January 2015. Refer Para 5.52.

11  Refer Para 5.25 of 2017 Guidelines

12     Refer Paras 5.56 to 5.59 of 2017 Guidelines

Detailed
discussion and analysis of the contents of Master File, Local File and CbCR
have been kept outside the purview of this Article. One may refer to Annex 1,
Annex II and Annex III to Chapter V of the 2017 Guidelines for the details of
contents of the Master File, Local file and CbCR respectively.

4. Administrative approaches
to avoiding and resolving transfer pricing disputes  

The 2017 Guidelines
have provided administrative approaches to resolving transfer pricing disputes
caused by transfer pricing adjustments and for avoiding double taxation.
Differences in guidance as compared to the earlier guidance have been discussed
in this section.

• MAP and Corresponding
  Adjustments

The 2017 Guidelines
provide that procedure of Article 25 dealing with Mutual Agreement Procedure
(MAP) may be used to consider corresponding adjustments arising out of transfer
pricing adjustments.

The 2017 Guidelines
specifically discusses regarding the concern of taxpayers in relation to denial
of access to MAP in transfer pricing cases. The Guidelines make a reference to
the minimum standard agreed as a result of the BEPS Action 14 on ‘Making
Dispute Resolution Mechanisms More Effective’ and re-emphasise the commitment
on the part of countries to provide access to the MAP in transfer pricing
cases. The Guidelines also provide detailed guidance relating to time limits,
duration, taxpayer participation, publication of MAP programme guidance,
suspension of collection procedures during pendency of MAP etc. Overall, the
idea appears to be to make the MAP program more effective and meaningful for
taxpayers, and to enhance accountability of the tax administration in MAP
cases.

• Safe Harbours

The 2017 Guidelines
highlight the following benefits of safe harbours:¹³

•     Simplifying compliance

•     Providing certainty to taxpayers

•     Better utilisation of resources available
to tax administration

____________________________-

13 
Refer Para 4.105 of 2017 Guidelines

The Guidelines also
highlight the following concerns relating to safe harbours:¹⁴

•     Potential divergence from the arm’s length
principle

•     Risk of double taxation or double non
taxation

•     Potential opening of avenues for
inappropriate tax planning

•     Issues of equity and uniformity

__________________________

14 
Refer Para 4.110 of 2017 Guidelines

The 2017 Guidelines
provide that in cases involving small taxpayers or less complex transactions,
the benefits of safe harbours may outweigh the problems / concerns raised in
relation to safe harbours. The appropriateness of safe harbours can be expected
to be most apparent when they are directed at taxpayers and / or transactions
which involve low transfer pricing risks and when they are adopted on a
bilateral or multilateral basis. The Guidelines however provide that for more
complex and higher risk transfer pricing matters, it is unlikely that safe
harbours will provide a workable alternative to rigorous case by case
application of the arm’s length principle.

Concluding Remarks

The 2017 Guidelines
reflect the clarifications and revisions agreed in reports on BEPS Actions 8-10
(Aligning Transfer Pricing Outcomes with Value Creation), Action 13 (Transfer
Pricing Documentation and Country by Country Reporting), and Action 14 (Making
Dispute Resolution Mechanisms More Effective).

Evidently, the
focus areas of the 2017 Guidelines are substance, transparency and certainty.
Several practices and recommendations of the Indian tax administration do find
place in the BEPS Actions, and consequently, in the 2017 Guidelines also. India
is largely aligned with the 2017 Guidelines.

Even at the grass
root level, taxpayers and professionals are already experiencing the evolution
of transfer pricing analysis from a contractual terms based analysis to a more
deep rooted factual analysis considering several facts and circumstances
surrounding the transaction. Further, the way this analysis is documented is
also being transformed – from a jurisdiction specific documentation, to a
globally consistent, three-tiered documentation.

From the
perspective of the tax authorities, they now have the ‘big picture’ available
to them. This should enable them to undertake a comprehensive and more
business-like analysis of the MNE’s transfer pricing approaches.