Differences in interpretation in applying BEPS changes

This article appeared first in International Tax Review (September 27, 2022).


Rather than simplifying and standardising international tax, the OECD BEPS recommendations have led to a complex landscape. Vrajesh Dutia and Eric Lesprit of Deloitte analyse the application of the guidance across several high-profile jurisdictions.

It has been several years since the BEPS action reports were finalised and incorporated into the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Some of the key changes that were adopted addressed risks, intangibles, and documentation. However, the application of these changes has been less linear than anticipated.

This article will review the differences in the application of these changes in several jurisdictions that are representative of distinct approaches (Australia, China, France, Germany, India, Spain, UK, and the US).

Risks and intangibles

In many jurisdictions, tax authorities decline to acknowledge any fundamental change in their positions pre and post BEPS. For these countries, BEPS clarified certain positions and arguments that the tax authorities had already advanced.

For example, before the introduction of the concept of development, enhancement, maintenance, protection, and exploitation of intangibles (DEMPE) in the Chinese transfer pricing (TP) regulations, the State Taxation Administration (STA) had advocated similar concepts, but they were not widely used by local authorities in TP audits. However, post BEPS, in most intangible-related audit cases, the tax authorities have focused on the activities of local entities in China that contribute to enhancing or promoting the brand owned by an overseas group entity.

Similarly, in India, even pre BEPS, tax authorities argued that advertising, marketing, and promotion expenses incurred by local entities were excessive compared with uncontrolled companies. Hence, the excess expense was deemed to enhance the marketing intangibles owned by the overseas related entity. This issue is to be decided by the Supreme Court in India.

In addition, for years the tax authorities in India argued that R&D functions performed by the Indian affiliate contribute to the development of intangibles owned by the foreign principal. The tax authorities had issued a circular in 2013 that categorised R&D centres into entrepreneurial, cost-sharing, or contract R&D, based on the functions, assets, and risks assumed by the overseas principal and the R&D centre in India.

Overall, the tax authorities in China and India are focused on increasing the returns of local entities by compensating them for their ‘contributions’ towards the development, enhancement, or promotion of the intangibles. In most cases, the tax authorities stop short of a complete DEMPE analysis or application of a profit split but instead propose adjustments by selecting high-profit comparables or imputing a royalty for local activities that are deemed to enhance the value of the intangible property (IP).

In ‘mature’ countries such as Australia, France, Spain, and the UK, the BEPS clarifications have led tax authorities to allocate additional profit to functions and risks that in their view are managed by the local entities. Hard-to-value intangibles (HTVI) principles are now a regular starting point for French and German tax auditors and they often raise challenges with respect to valuation issues and the level of remuneration. They have developed sound technical skills and rely on dedicated TP specialists trained to handle challenging cases with large taxpayers.

Similar to India, the tax authorities in Spain are targeting technology intangibles that are ‘supposed’ to have been developed in Spain. However, unlike India, the Spanish tax authorities undertake detailed DEMPE analysis to defend their arguments, which often results in a royalty charge to compensate intangible development costs borne in Spain.

In the UK, HM Revenue & Customs (HMRC) is more inclined to look at risks from the perspective of the actual operations of a company, such that the individuals who make decisions regarding key risks are deemed to be the individuals who control those risks. For example, if an offshore entity contractually assumes a particular risk and asks the UK entity to manage and control that risk, the fee to the UK would be similar to the profits/losses resulting from the management of these risks.

In the case of intangibles, when the main function of the local entity is to develop IP for an offshore owner and that owner only controls financing and does not make decisions, HMRC may argue that operationally the activity would be managed by the local entity, hence the local entity should get the economic benefit of the IP.

In the US, there is some pressure to reconcile the BEPS guidance and the existing US TP regulations. During mutual agreement procedure (MAP) or advance pricing agreement (APA) negotiations with treaty partners, BEPS actions 8–10 and DEMPE are on the table. However, for the purposes of local compliance and audits outside the treaty context, the US TP regulations take precedence.

Permanent establishment (PE)

The recommendations under BEPS Action 7 were among the most important in the first tranche of guidance in 2015, serving as a clarification of governing principles (even if facts are crucial and one case cannot be fully compared to another) and as an overall strengthening of the rules.

Tax authorities’ expectations about explanations and the evidence of multinational enterprises (MNEs) have increased the implementation process and led some countries to make major changes, with MNEs modifying their intra-group operations to mitigate PE risks.

This concern is still a top priority for all countries. In Australia, for example, the BEPS recommendations have offered a target to tax audit services. Tax auditors are more comfortable developing their arguments: these recommendations are a track for investigations and useful help when drafting their reassessment notice. Experience shows that the OECD BEPS guidance is useful for auditors, as they are more likely to challenge controlled groups’ positions and to draft cogent tax reassessment notices.

A similar trend is also seen in other countries. The PE issue has long been pursued by certain European countries. France, Germany, Spain, and the UK have always applied a strict PE analysis.

In France, tax raids slowed during the pandemic, but are returning to pre-pandemic levels, at least with respect to PEs. China is probably also willing to take a careful look, but no dramatic change has been seen, as it may be conserving scarce resources for other types of audits. In India, as in other countries, the pressure to increase local revenues is high but it is now possible to include PE issues in an APA (though India does not follow the authorised OECD approach (AoA) for the attribution of profits to PEs), as it is in France. This should provide more security regarding transactions covered by the agreement, even if in India it can be seen as a mechanism to generate more local revenue.

Profit split

OECD clarifications in the BEPS recommendations were crucial regarding this TP method. The profit split method (PSM – used here to include the contribution and the residual profit split method) was not commonly used by tax authorities. It was seen as complicated to implement, calculations were difficult to apply over time, and the methods used information that was difficult for tax authorities to obtain and evaluate.

Taxpayers were reluctant to use the PSM, knowing it could be controversial and tax authorities were not keen on using it. BEPS recommendations provided clarifications and explanations that made the PSM a less controversial method. Tax authorities now use it with more confidence.

In the UK, post BEPS, HMRC is applying the PSM to a wider set of fact patterns. In Australia and Germany, tax audit services are also using the method more frequently; however, it is still mainly used as a corroborative method rather than a primary method. Moreover, a PSM would not be recommended in Australia as it could lead to longer and more in-depth audits.

Interestingly, France was historically willing to use the PSM, particularly in APA negotiations, but after the BEPS recommendations, the tax audit services have also been considering it in a wider variety of cases. Now they use the method not only to corroborate the results of other TP methods, but also for purposes of developing adjustments in the first instance (that could be challenging as they would base the calculation on rough figures, because detailed information is difficult to access from outside the group).

Financial transactions

Action 4 (and elements of Action 2) of the OECD BEPS recommendations have highlighted the possible use of financial transactions to shift profits from one country to another. Appropriate tools to fight against base erosion involving interest deductions and financial payments were then suggested to tax authorities. If this issue was already of great interest for authorities in the pre-BEPS world, it is obvious that countries have maintained this area of international tax and TP on their audit strategy agenda once the recommendations were made public.

China could probably be seen as less proactive on this issue, as the economic profile of the country means that financial transactions have less impact on MNE profits than transactions related to the sale of tangible property or royalties for the use of IP. Nevertheless, tax auditors in China have increased their scrutiny of interest deductions, in combination with recharacterisation of debt to equity and issues regarding thin capitalisation.

Other countries are actively examining financial transactions involving related parties, creating or developing expert teams (France, Germany), making wider use of specialised financial databases (Spain, India), and treating these transactions as a focus during tax audits (France, Germany, India, Spain, US). The OECD guidance has provided technical insights, which are now being used by tax audit services to develop their technical positions concerning specific types of transactions (guarantee fees, parental support, nature of transaction compared to third parties, risk valuation, etc.).


The BEPS Action 13 recommendation regarding three-level compliance (master file (MF), local file (LF), and country-by-country (CbC) reporting) has been adopted by most countries, including many that already had some requirements in this regard. In most countries, increased enforcement of TP documentation rules applies and tax authorities are more inclined to assess penalties with regard to TP documentation that is considered to be deficient.

In China, the STA now requires documentation to include an in-depth discussion of any intangible development activities that are taking place. Also, the value chain analysis (VCA) is required to be documented in detail. In practice, however, high-level information is provided in documentation reports.

India, on the other hand, has introduced MF and CbC reporting in local regulations. However, there is no change in the regulations in terms of LF content. In addition, the MF is not submitted to the tax officer; it is evaluated by a separate team in the tax department that is responsible for risk assessment. Only the relevant portions of the MF, with prior approval from senior tax officials, can be shared with the tax officers (limiting access to global information).

In the UK, the TP rules require that the taxpayer must know when it files the tax return for a particular year that the transfer prices reflected on the return are arm’s length (no specific amount of documentation is required to be maintained). For an accounting period starting on or after 1 April 2023, the taxpayer will need to have an MF, a LF, and an audit trail of the process undertaken to determine the arm’s-length nature of the transfer prices, as of the filing date of the tax return.

A dramatically changed landscape

The above clearly shows that the BEPS OECD recommendations have been a game changer on various important matters of concern for multinational enterprises. The international tax and TP landscape has dramatically changed, as groups must now be careful when implementing their internal policy; they have to pay specific attention to country approaches.

To the extent that the BEPS guidance has not been implemented in a uniform manner in all countries, the recommendations have raised concerns to the tax authorities and made tax auditors aware of issues and directions to investigate.

Contrary to the OECD’s goal, the international tax context is even more complex after the BEPS recommendations, as the advantage of clearer rules is counterbalanced by an increased differentiation of national tax authorities’ positions. This global tax context triggers higher risks of reassessments and long discussions with tax authorities.

No perfect tool is available to mitigate this tax exposure, but groups will probably gain in having a look at all possibilities to gain security, including engaging in discussions with tax authorities, whether in a multilateral or unilateral procedure. This way, they can explain their position and have open-minded discussions before tax audits, taking advantage of various ‘compliance and trustful relationship’ procedures now available in most countries.

Photo de Eric Lesprit
Eric Lesprit

Eric a plus de 25 ans d’expérience en matière de fiscalité internationale, notamment en matière de prix de transfert. Il a exercé différentes responsabilités au sein de la Direction Générale […]

Vrajesh Dutia

Vrajesh est comptable et travaille comme professionnel des prix de transfert depuis plus de 17 ans. Il est associé chez Deloitte India et fait partie du Global Transfer Pricing Center […]