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OECD BEPS 2.0 – Pillar One & Pillar Two Blueprints Released


The Pillar One and Two blueprints (BEPS 2.0) following a meeting of the OECD-led coalition of 137 countries, were released yesterday.

Contrary to expectations, there was no agreement on either blueprint by the Inclusive Framework members and it is now expected that consensus could be achieved by mid-2021.


The Blueprint documents are fairly consistent with previous communication from the OECD and demonstrate an evolution of the Unified Approach proposals from last October. In summary:
  • Pillar One continues to advocate the creation of a new taxing right and new nexus rules that move away from the traditional “physical presence” requirements; and
  • Pillar Two proposes the introduction of a global minimum tax and rules, to minimize global tax competition.
From a Pillar One perspective, countries are yet to agree on the scope, Amount A, and whether, as proposed by the United States, Pillar One reform should be made optional for multinationals. Also unresolved is the issue of how much profit is considered residual profit and what percentage would be reallocated. For Amount A, there is general agreement on the need for a new taxing right that is not based on physical presence and on a solution anchored on a net basis tax that uses a formulaic approach for the allocation of profits for business within the scope of Pillar One.

There is a general agreement that any solution will have to use thresholds, that consolidated financial accounts should be used as the starting point with limited book to tax adjustments, and that losses are taken into account (although this requires to be refined). There is also general agreement that segmentation is required to determine the tax base along with a broad safe harbor or exemption rules to reduce complexity.

There is a commitment to make sure that double tax is eliminated in a multilateral setting. Countries want to make progress on determining Amount B to simplify transfer pricing calculations for baseline marketing and distribution activities. A solution for Pillar One would include a new multilateral tax certainty process. For Amount A, a multilateral convention would be developed to implement the solution.

From a Pillar Two perspective, while a number of elements have been broadly agreed to, a “subject to tax rule” will have to be included for it to have a political agreement and reach global consensus.

The report provides an “impact assessment” although not for each country. Some key highlights:
  • The overall impact is likely to boost global corporate income tax revenues by up to 4% ($100 billion), with global gains expected to be derived primarily from the implementation of Pillar Two.
  • Pillar One is expected to result in a further reallocation of $100 billion to market jurisdictions (which, for some business models, are the jurisdictions where the users are located) which is likely to result in a modest increase in global tax revenues.
  • The impact assessment goes on to further clarify that the proposals will predominantly impact taxpayers that are high-profitable multi-national enterprises (“MNEs”) that are digitalized and use significant intangibles in the case of Pillar One, and MNE’s engaging in profit shifting in the case of Pillar Two.
Next steps:

The Blueprint documents are scheduled to be discussed at the G20 Finance Ministers and Central Bank Governors meeting on October 14, and a public consultation process has begun inviting stakeholder feedback and open until December 14, 2020.

Multinational Groups should actively continue monitoring progress leading up to countries arriving at a consensus and contribute to the consultation process that closes at the end of this year. Businesses with a digital footprint that heavily rely on intangibles, should model the impact of these proposals. Furthermore, businesses that have continued to retain traditional tax structures and/or that rely on traditional physical presence requirements, should review such arrangements

A copy of the report released by the OECD can be viewed here: https://www.oecd.org/tax/beps/tax-challenges-arising-from-digitalisation-report-on-pillar-one-blueprint-beba0634-en.htm

If you’d like to know more or how this might be relevant to your global business and inter-company arrangements, contact our Transfer Pricing Leader, Avinash S. Tukrel.

Segal Named Among “Best of the Best” Firms

Segal LLP is pleased to announce that for the fourth consecutive year, we have been named one of the “Best of the Best Firms” in Canada by Inside Public Accounting (IPA).

The IPA Best of the Best award recognizes firms ranked on their performance in specific key areas of management, growth and strategic vision. In 2020, more than 540 firms across North America, were considered for this award, and we are thrilled to again be chosen as one of the top firms in Canada.

“Best of the Best firms represent the top performers of their peer group, which is an exceptional accomplishment in the competitive world of public accounting. They excel by leaning in to help clients, being proactive, and seeking solutions – not just selling services,” says Michael Platt, publisher of INSIDE Public Accounting.

“We are extremely proud to be named amongst the Best of the Best in Canada. Our team collectively strives to deliver the best service to our clients, and this award is testament to that. The Partners and the Segal Team are honoured to be receiving this acknowledgement for the fourth year in a row.” says Dan Natale, Managing Partner at Segal.

Residual Profit Split Method And Its New Acceptance In Europe


The OECD’s Base Erosion and Profit Shifting (BEPS) effort has resulted in many changes in global transfer pricing systems. Rapid developments in the business world, generally and currently caused by the corona crisis, make it necessary to constantly review and, if necessary, adjust transfer pricing systems. As a result, multinational enterprises more and more opt for transfer pricing methods such as the Profit Split Method using a residual analysis (RPSM). In the context of cross-border transfer pricing and the ongoing digitalisation process emphasis is placed on platform concepts.

With the recent focus on profit shifting around the world, in June 2018 the OECD published a Report containing Revised Guidelines on the application of RPSM under BEPS[1] project to clarify and notably expand the Guidelines on when a residual profit split may be the most appropriate method.[2] This has led to a wider acceptance of RPSM in Europe. In line with the arm’s length principle, the RPSM measures the net operating profits realized from controlled transactions and compares the detected profit level to the profit level realized by comparable independent enterprises that are engaged in comparable transactions.

[1] OECD, Addressing Base Erosion and Profit Shifting, 2013.
[2] OECD, Revised Guidance on the Application of the Transactional Profit Split Method, 2018.

The profit-based RPSM is becoming an obvious choice for the use of platform concepts in connection with intangible assets, such as product-know-how and intellectual property.

As a result of the crisis, value-added processes are being rethought and platform concepts no longer solely focus on product sales. Digitalisation favours new business models regarding intangibles, which are platform concepts enable multinational companies to improve the sustainability of life cycles and recycling processes and to prevent sunk costs.

Through platform concepts, it is possible to produce in one country what has been conceived and developed in another location around the world.

Companies all over Europe exploit the potential of these intelligent processes. The local company uses the platform developed by an entrepreneur as well as the data and information (intellectual property) provided therein. In the age of globalisation, the movement towards more sustainability also leads to changes in price setting along the value chains and thus the transfer pricing system itself.

The most appropriate cross-border transfer pricing method has to be selected for each particular case, taking into account the respective strengths and weaknesses of each approach. There are several indicators for the consideration of the RPSM (OECD, Revised Guidance on the Application of the Transactional Profit Split Method, 2018, para. 2.125 f). The clearest indicator are unique and valuable contributions made by each entity. It may not be appropriate to use the RPSM, if one of the transaction partners performs only simple functions. Furthermore, the business operations shall be highly integrated such that the contributions of the parties cannot be reliably evaluated in isolation from each other.

The last indicator is the shared assumption of economically significant risks and simultaneously the separate assumption of closely related risks. Besides, the lack of external comparables per se should not lead to default use of RPSM (OCED, Revised Guidance on the Application of the Transactional Profit Split Method, 2018, para 2.128 and 2.143).

The first step involved in the RPSM is the identification of the relevant profit with regard to the respective transactions. Secondly, the residual profit is divided between the companies involved in the cross- border transaction on the basis of the relative value of their contributions. Thus, the allocation is based on a measurement of each party’s investment in intangible assets or their specific contributions to value drivers. Transfer pricing experts determine appropriate profit splitting factor(s), which can be based on e.g. assets or capital (like intangibles) or costs. During the application, the objective is to approximate as closely as possible the split of profits that would have been realised by third independent companies. The first step involved in the RPSM is the identification of the relevant profit with regard to the respective transactions. Secondly, the residual profit is divided between the companies involved in the cross- border transaction on the basis of the relative value of their contributions. Thus, the allocation is based on a measurement of each party’s investment in intangible assets or their specific contributions to value drivers. Transfer pricing experts determine appropriate profit splitting factor(s), which can be based on e.g. assets or capital (like intangibles) or costs. During the application, the objective is to approximate as closely as possible the split of profits that would have been realised by third independent companies.
Albeit the increased popularity of RPSM, its drawbacks should be pointed out. Due to the high degree of subjectivity, it offers tax authorities the possibility to allocate a disproportionate amount of profits to a related enterprise engaging in the respective transaction. This may lead to disputes and therefore increases the risk of litigation, which can be prevented by the ongoing support of transfer pricing experts. Furthermore, the number of mutual agreement procedures (MAP) might increase.

In determining the most appropriate method, B’s functions must be observed. The remaining profit should be divided between the two entrepreneurs of the group. Regarding the development and application of intangible assets the so-called DEMPE- functions (development, enhancement, maintenance, protection and exploitation) are associated with the application of the RPSM (OCED, Addressing the tax challenges of the digitalisation of the economy, 2019, para 1.3). In particular, concerning sharing of platforms, the DEMPE-functions shall be used in accordance with the company’s contribution to value creation.

The forecasted profit rates must be within the in- terquartile range developed through a benchmark study. The receiving company (B) of the intangi-ble assets transferred must still be in a position to make an adequate profit despite the user fee. A third party would not enter into a contract which would force it to permanently enter into losses (see German IDW Standard S5, 2015, para. 127).

The RPSM is likely to be conform with the arm’s length principle in relatively high-profit systems, where constant positive residual profits can be expected. Generally speaking, this applies to multinational companies that are expanding their future sustainability by using platform concepts. Until recently, (R)PSM has not been acknowledged as a transfer pricing method by the German tax authorities. Therefore, the DEMPE-concept in using the RPSM is new for them and might create obstacles and hurdles. In practice, we see that some German tax authorities tend to review DEMPE/RPSM-models by the Transactional Net Margin Method as a second testing model.

The COVID-19 economic crisis will put the decision to select a certain transfer pricing method to the test. On the one hand side, the crisis can be the restart for the expansion of digitalisation in Europe. On the other hand, the pandemic might lead to loss situations for non-routine entities (and even in so- called routine entities). Regarding platform concepts and typical license agreements the question arises how such a loss shall be allocated between the licensor and licensee of multinational companies. Open to debate in the example above is how much of the expected loss the licensee should bear for taking on the market risks concerning costumer acquisition as opposed to the licensor as the provider of intangible assets.

Due to the emergence of new business models, it is to be assumed that the RPSM is going to be applied more often in the future. To meet the challenges of platform concepts a forward-looking and proactive policy is needed. The uncertainty of the economic future makes the choice of the most appropriate transfer pricing method more challenging and simultaneously more important than ever.

Dr. Sven Helm
Global Leader in Transfer Pricing

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Managing Transfer Pricing Risks And Their Impact In Uncertain Times

The world as we know has and continued to rapidly change because of COVID-19 and the ongoing political developments such as the upcoming elections in the United States (US), the United Kingdom’s (UK) impending exit from the European Union (BREXIT), trade wars between economic superpowers, and climate change, among other global emergencies.

COVID-19 being the most recent health crisis was categorized as a pandemic by the World Health Organization (WHO). This pandemic has not just impacted individual health and stretched health care systems worldwide, it has substantially impacted the world’s financial markets and economies, affecting global supply chains and profitability for years to come.

China had to initiate factory lockdowns early on, which impacted global production output and caused delays in distribution to end markets. Factory closures in China and lockdowns in key economic centers worldwide, had a domino effect on other industries such as oil and gas, airlines and hospitality and retail, among others. Governments worldwide have announced emergency fiscal measures including Central Banks slashing interest rates on borrowings to insulate their economies from the effects of recession.

While the macro economic impact of COVID-19 crisis continues to be evaluated, it is critical that multinational corporations that are operating cross-border and entering into inter-company transactions, manage their response to this development. This would include assessing the impact the crisis has had on their profitability as well as a potential overhaul of their global supply chains. Some considerations to note from a transfer pricing perspective are:
  • Revisit transfer pricing models and policies: In instances where a multinational group has had a significant impact on its performance and chooses to restructure its operations by reallocating functions, assets and risks (FAR) to better manage its supply chain it will be important that the transfer pricing model / policy be revisited and updated accordingly. Where this results in a change to the transaction profile as well as the terms and conditions that govern inter-company contracts (examples include, an increase in inter-company financing and related guarantees, increase/decrease in sale/purchase prices, interactions due to inter-company services, negotiation of customer contracts, change to credit terms, impact on inventory flows due to supply disruptions among others), it could result in changes to inter-company pricing basis and the arm’s length returns attributable to each entity involved. It should not be assumed in the current environment, where the parent entity that traditionally performed key Functions, owned high-value Assets (including intellectual property) and assumed significant Risks (FAR), would be the only entity to centralize Group wide losses while the other entities remain profitable.
  • Perform Function, Asset and Risk and Value Chain analysis: While updating transfer pricing policies and inter-company pricing models, it is critical that the multinational group perform a thorough value chain analysis to reflect changes that may have occurred in each of the entity’s key functions, asset ownership and assumption of risks.
  • Economic analysis: One of the key principles when performing an economic analysis to determine the arm’s length range of returns to substantiate a taxpayer’s position is that significant events be factored in and such analysis be revisited. The traditional practice of updating or a roll-forward of comparable company benchmarks / prices using the comparable uncontrolled price (CUP) method, are unlikely to reflect the most up to date economic realities faced by the multinational group. As such, taxpayers may have to consider the following options:
    • Reallocation of the FAR and use of the Profit Split Method (PSM) – taxpayers may potentially consider adoption of the profit split approach and allocate profits/losses, if suitable. Although when adopting the PSM, it is crucial that several (stringent) conditions are met and there is a clear identification of value generated by each entity involved, resulting in the allocation of profits/losses. A simplistic approach to adopting the PSM is not only likely to attract scrutiny, it will be challenging to document the rationale and support the arm’s length nature of such an allocation.
    • Consistent loss-making comparable benchmarks – when performing a benchmarking study to identify a comparable set, the approach of outright rejecting consistent loss-making companies may have to be revisited.
    • Use of the CUP and price comparisons – where a taxpayer relies on price benchmarks using the CUP method, it will be important that the 5 factors of comparability be evaluated in context of any changes and determine if the price comparison continues to remain appropriate.
  • Employees and secondment arrangements: cross-border arrangements include key personnel (employees) and it is therefore critical that multinational groups assess the impact of ongoing changes to immigration law considering a crisis like COVID-19. These changes will have a direct impact on employees on secondments to other countries as well as the inter-company arrangement(s) in question. Additionally, if employees that travel for business to other locations and are unable to return to their home country due to travel restrictions and advisories, therefore, warranting remote working arrangements, such arrangements could create permanent establishment (PE) implications for the multinational group. While the Canada Revenue Agency (CRA) has issued pronouncements that there will not be a PE if the employees are in Canada because of travel restrictions, this position might differ country to country.
  • Governance and implementation of changes: Where multinational groups make changes to the transfer pricing model/policy, these changes should be immediately reflected in the inter-company agreements, inter-company accounting systems, invoices as well as ensure any year-end adjustments required are put through prior to the close of the financial year or filing the annual tax return, to reflect the up to date facts and circumstances.
  • Document impact on business: where multinational groups have made changes to their transfer pricing model/policy or adversely impacted by the COVID-19 crisis, it will be imperative that taxpayers be able to articulate such changes and/or the reasons for changes to the profitability, in their annual transfer pricing documentation. While this could vary depending on the industry, it will be crucial to document any variances to performance as a first instance to defending the taxpayer’s transfer pricing position to tax authorities, going forward. Alternatively, if a taxpayer is pursuing an Advance Pricing Arrangement (APA), the taxpayer should model and document the impact on the business as this will qualify as a change to the crucial, underlying assumptions on which the APA is/will be based.
  • Manage transfer pricing obligations – where a multinational group is required to prepare and file a Country-by-Country Report (CbCR) and/or CbCR notifications, local transfer pricing disclosures as well as prepare or file a Group Master File, multinational groups should monitor any changes to filing deadlines (where these might be extended in the short term). Such filings should incorporate both quantitative (information on accounting adjustments, write-off’s, disposal of assets etc.,) and qualitative information on the impact on the multinational group’s business. If one or more entities is faced with a local transfer pricing audit, it is important that deadlines be managed with the tax authority accordingly and any delays to submission of information requested are agreed upon.
  • Other taxes – if a multinational group, restructures its operations due to the impact of COVID-19 and the inter-company transactions are subject to withholding taxes, Customs or Goods and Services Tax (GST) / Harmonized Sales Tax (HST) / Value Added Tax (VAT) etc., it will be critical that the effect of these taxes be assessed when making changes. Alternatively, if a multinational group exits a certain market, it might need to meet exit tax and compliance obligations, prior to such closure or disposal.
Managing transfer pricing risks is going to be critical as businesses and Governments navigate uncertain times. Multinational Groups until most recently have been witness to the renewed focus being placed on transfer pricing and tax transparency by the Organisation for Economic Cooperation and Development (OECD) by way of the BEPS 2.0 project. With this continuing to be a key focus for the OECD and tax authorities worldwide, along with a global crisis such as COVID-19, transfer pricing arrangements are likely to see increased scrutiny by tax authorities and viewed as a key driver for tax revenue to balance fiscal deficits and manage tax collection targets.

Contact our Transfer Pricing Principal & Practice Leader, Avinash S. Tukrel, if you have any questions or would like to discuss how this might affect your European business operations.

2020/2021 Tax Series for Accountants

We are pleased to announce the return of Segal’s Tax Series For Accountants for 2020/2021, hosted by our Tax Partner, Howard Wasserman.

We invite any interested accounting professionals to join us for a great seminar series, covering a range of relevant tax topics.

The series will span over the following four days:
  • Wednesday, September 30th, 2020
  • Friday, October 30th, 2020
  • Friday, November 27th, 2020
  • Tuesday, January 26th, 2021
To ensure the safety of our speakers and guests, we have made the decision to host the first three seminars online. The sessions will be presented live, giving attendees the opportunity to ask questions.

While we cannot be together for breakfast this year,  we will be sending guests an electronic gift card to enjoy coffee and a bagel for the first session.  

If you are unable to “attend” the live presentation, don’t worry, the session will be available to watch recorded. Our fourth and final seminar is tentatively scheduled to be held in-person, however, this may be subject to change based on health and safety regulations. We hope you will join us again this year and we look forward to seeing you!
The event is $305 (plus HST) to attend. This includes four 2 hour sessions and learning materials.

Each seminar will run from 8:30 am to 10:30 am.

The Tax Series will be hosted online and the link to attend will be sent to attendees the week prior.

CPD: Attending these 4 sessions will provide 8 hours of verified CPD hours with an attendance certificate provided.

September 30th, 2020

  • Impact of COVID 19 Tax Rules
  • CEWS – What You Need to be Aware of
  • CRA Approach to Non-Resident Situations

October 30th, 2020

  • Integration and Tax Rates
  • Year-end Planning, Including Salary/Dividends
  • Operating Loss Planning
  • How to Structure Low-Interest Loans to Family Members

November 27th, 2020

  • Debt Forgiveness Rules
  • Capital Loss Planning

January 26th, 2021

  • Separation and Divorce
  • Transfer Pricing