Centre for Tax Policy and Administration

Discussion Draft on the Transfer Pricing Aspects of Business Restructurings


from 19 September 2008 to 19 February 2009


The OECD Committee on Fiscal Affairs has released for public comments a discussion draft on the Transfer Pricing Aspects of Business Restructurings.


Business restructurings by multinational enterprises have been a widespread phenomenon in recent years. They involve the cross border redeployment of functions, assets and / or risks between associated enterprises, with consequent effects on the profit and loss potential in each country. Restructurings may involve cross-border transfers of valuable intangibles, and they have typically consisted of the conversion of full-fledged distributors into limited-risk distributors or commissionnaires for a related party that may operate as a principal; the conversion of full-fledged manufacturers into contract-manufacturers or toll-manufacturers for a related party that may operate as a principal; and the rationalisation and / or specialisation of operations.


As evidenced by a January 2005 OECD Centre on Tax Policy and Administration Roundtable, these restructurings raise difficult transfer pricing and treaty issues for which there is currently insufficient OECD guidance under both the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “TP Guidelines”) and the OECD Model Tax Convention on Income and on Capital (the “Model Tax Convention”) (see outcome of the January 2005 CTPA Roundtable. These issues involve primarily the application of transfer pricing rules upon and / or after the conversion, the determination of the existence of, and attribution of profits to, permanent establishments (“PEs”), and the recognition or non-recognition of transactions. In the absence of a common understanding on how these issues should be treated, they may lead to significant uncertainty for both business and governments as well as possible double taxation or double non-taxation. Recognising the need for work to be done in this area, the Committee on Fiscal Affairs (“CFA”) decided to start a project to develop guidance on these transfer pricing and treaty issues.


In 2005 the CFA created a Joint Working Group  (“the JWG”) of delegates from Working Party No. 1 (responsible for the Model Tax Convention) and Working Party No. 6 (responsible for the TP Guidelines) to initiate the work on these issues. At the end of 2007, having taken stock of the progress made to that point, the CFA referred the work on the transfer pricing aspects of business restructurings to Working Party No. 6 and the work on the PE threshold aspects to Working Party No. 1. The discussion draft being released today has resulted from the work done on the transfer pricing issues by the JWG and Working Party No. 6. Working Party No. 1 intends to consider PE definitional issues under Article 5 of the Model Tax Convention, both in the context of business restructurings and more broadly, as part of its 2009-2010 programme of work, which will result in a separate discussion draft.


This discussion draft only covers transactions between related parties in the context of Article 9 of the Model Tax Convention and does not address the attribution of profits within a single enterprise on the basis of Article 7 of the Model Tax Convention, as this was the subject of the Report on the Attribution of Profits to Permanent Establishments which was approved by the Committee on Fiscal Affairs on 24 June 2008 and by the OECD Council for publication on 17 July 2008. The analysis in this discussion draft is based on the existing transfer pricing rules. In particular, this discussion draft starts from the premise that the arm’s length principle and the TP Guidelines do not and should not apply differently to post-restructuring transactions than to transactions that were structured as such from the beginning.


This discussion draft is composed of four Issues Notes.   


In light of the importance of risk allocation in relation to business restructurings, the first Issues Note provides general guidance on the allocation of risks between related parties in an Article 9 context and in particular the interpretation and application of paragraphs 1.26 to 1.29 of the TP Guidelines.


The second Issues Note, “Arm’s length compensation for the restructuring itself”, discusses the application of the arm’s length principle and TP Guidelines to the restructuring itself, in particular the circumstances in which at arm’s length the restructured entity would receive compensation for the transfer of functions, assets and / or risks, and / or an indemnification for the termination or substantial renegotiation of the existing arrangements.


The third Issues Note examines the application of the arm’s length principle and the TP Guidelines to post-restructuring arrangements. 


The fourth Issues Note discusses some important notions in relation to the exceptional circumstances where a tax administration may consider not recognising a transaction or structure adopted by a taxpayer, based on an analysis of the existing guidance at paragraphs 1.36-1.41 of the TP Guidelines and of the relationship between these paragraphs and other parts of the TP Guidelines.


The Committee invites interested parties to send comments on this discussion draft before 19 February 2009. Comments should be sent electronically (in Word format) to


Unless otherwise requested at the time of submission, comments submitted to the OECD in response to this invitation will be posted on the OECD website.