Transfer Pricing Aspects of Cross-Border Commodity Transactions
We have now published our submission to the consultation on BEPS Action Point 10 Transfer Pricing Aspects of Cross-Border Commodity Transactions.
Consideration of the so-called Sixth Method of transfer pricing adjustment for commodities, as used in a number of countries especially in Latin America, is important. However, in our view this report misunderstands the method and the reasons for using it, and its proposals are inappropriate.
The Sixth Method has been adopted by a number of developing countries because it has a number of advantages, but they have also in practice experienced difficulties applying it. Its advantages are that since many commodities are traded on public exchanges, a quoted price can provide a clear and relatively objective point of reference. Hence, it can provide a basis for rules which are easy to administer and do not involve either subjective judgment or detailed examination of facts and circumstances.
However, this does not mean, as the report suggests, that such a quoted price can be used as a ‘comparable uncontrolled price’ (CUP) to adjust the terms of transactions within a multinational corporate group. Independent parties trading commodities settle their agreements in open markets and generally based on future prices, which is quite different from transactions between related parties within large corporate groups. These are generally vertically-integrated, so that the commodity is transferred to the related party for processing and perhaps eventual use in manufacturing; or they are large diversified commodity traders and brokerages. Transfers within such large integrated corporate groups cannot be regarded as in any way equivalent to transactions between unrelated parties, and should not be regarded as the starting point.
The report points to some of the many factors to be taken into account in comparing a quoted price with the actual relationships between a commodity producer and the rest of the MNE group. In our view, these many differences mean that the aim should not be to conduct an exhaustive and detailed comparability analysis of all the contracts involved to arrive at the ‘correct’ price. This would undermine the main advantage of the Sixth Method, which is to provide a clear and objective standard, which is easy to administer.
We suggest that quoted prices should be used as a guide, taking into account the comparability factors mentioned in the report (and others), on the basis of which the tax authority should establish a benchmark price. Such a price should be one that results in an appropriate level of profit for the affiliate based on its activities in the country, and taking into account the value it creates for the MNE as a whole. This includes the benefits of providing a source of supply combined with the management of stocks and of ultimate delivery, and access to raw materials which is a type of location-specific advantage.