1. Transfer pricing simplification and safe harbours
Grace Perez-Navarro, Deputy Director, Centre for Tax Policy and Administration, OECD

2. OECD’s project on the simplification of transfer pricing administration
Work programme
Revised wording of guidance on safe harbours in the OECD Transfer Pricing Guidelines
Templates for MOUs between treaty partners on bilateral safe harbours
Simplification of documentation requirements
Improving guidance on headquarters costs / low value added services

3. Improving the administration of transfer pricing - drivers
Compliance and enforcement costs are a concern for taxpayers and governments
Governments need to effectively use their limited specialist resource efficiently

4. Survey on TP Simplification Measures
OECD conducted a study on administrative aspects of TP which provides a review of techniques implemented by countries to optimize the use of taxpayers’ and tax administrations’ resources
2012 Report
Multi-country Analysis of Existing TP Simplification Measures
Five categories of simplification measures analysed in the survey:
Exemptions from TP rules or from TP adjustment
Simplified TP methods, safe harbour arm’s length ranges and safe harbour interest rates
Exemptions from or simplified documentation requirements
Exemptions from or alleviated penalties
Simplified APAs procedures or reduced APA charges.

5. What is a safe harbour? Safe Harbour:
Allows a defined category of taxpayers to follow a simple set of rules under TP which are automatically accepted by the revenue authorities
may have two variants:
certain transactions are excluded from the scope of application of TP provisions (in particular by setting thresholds)
the rules applying to them are simplified (e.g. by specifying “acceptable” prices, margins or methods)
“is a statutory provision that applies to a given category of taxpayers and that relieves taxpayers from certain obligations otherwise imposed by the tax code by substituting exceptional, usually simpler obligations” OECD TP Guidelines, 2010.
The use of safe harbors and simplification measures especially for small and/or low risk transactions and taxpayers can help ensure that that the resources of the tax administration and the taxpayers are efficiently allocated to areas of high risk, reducing taxpayer compliance costs, increasing certainty and improving administrative efficiency

6. OECD Guidance on Safe Harbours
Transfer Pricing Guidelines 1995
not recommended
2012 draft revision of section on safe harbours
In cases involving smaller taxpayers or less complex transactions, the benefits may outweigh the problems
Use of bilateral or multilateral safe harbours should be encouraged

7. Safe harbours on methods or margins - Implications for the tax authority
Determine an acceptable price or margin for a defined category of transaction –may involve a comparability analysis
Audit limited to checking whether specific transactions meet the defined criteria
If criteria is met, then must accept that relevant transaction will be exempt from TP rules or TP adjustment

8. Implications for the taxpayer
Must show that relevant transactions fall within the scope of the safe harbour
No need to produce further documentation or comparability analysis
Can opt out if can demonstrate arm’s length
Audits avoided
… and certainty of treatment

9. Benefits of a Safe Harbour Regime
Resources of the tax administration can be allocated to areas of high risk
Reduce taxpayers compliance costs
Provide certainty and predictability to the taxpayers
Enhance investment climate
Alleviate the problems associated with the lack of available comparable information in many developing countries
Compliance relief
4.98 Application of the arm’s length principle may require collection and analysis of data that may be difficult to obtain and/or evaluate. In certain cases, such complexity may be disproportionate to the size of the corporation or its level of controlled transactions.
4.99 Safe harbours could significantly ease compliance by exempting taxpayers from such provisions. Designed as a comfort mechanism, they allow greater flexibility especially in the areas where there are no matching or comparable arm’s length prices. Under a safe harbour, taxpayers would know in advance the range of prices or profit rates within which the corporation must fall in order to qualify for the safe harbour. Meeting such conditions would merely require the application of a simplified method, predominantly a measure of profitability, which would spare the taxpayer the search for comparables, thus saving time and resources which would otherwise be devoted to determining transfer prices.
E.3.2 Certainty
4.100 Another advantage provided by a safe harbour would be the certainty that the taxpayer’s transfer prices will be accepted by the tax administration. Qualifying taxpayers would have the assurance that they would not be subject to an audit or reassessment in connection with their transfer prices. The tax administration would accept without any further scrutiny any price or result exceeding a minimum threshold or falling within a predetermined range. For that purpose, taxpayers could be provided with relevant parameters which would provide a transfer price or a result deemed appropriate to the tax administration. This could be, for example, a series of sector-specific mark-ups or profit indicators.
E.3.3 Administrative simplicity
4.101 A safe harbour would result in a degree of administrative simplicity for the tax administration. Once the eligibility of certain taxpayers to the safe harbour has been established, those taxpayers would require minimal examination with respect to transfer prices or results of controlled transactions. Tax administrations could then allocate more resources to the examination of other transactions and taxpayers.

10. Possible drawbacks of a Safe Harbour Regime
may lead to departure from arm’s length pricing
may increase the risk of double taxation or double non-taxation when adopted unilaterally
may raise issues of equity and uniformity
The foregoing analysis suggests that while safe harbours could accomplish a number of objectives relating to the compliance with and administration of transfer pricing provisions, they raise fundamental problems. They could potentially have perverse effects on the pricing decisions of enterprises engaged in controlled transactions. They may also have a negative impact on the tax revenues of the country implementing the safe harbour as well as on the countries whose associated enterprises engage in controlled transactions with taxpayers electing a safe harbour. More importantly, safe harbours are generally not compatible with the enforcement of transfer prices consistent with the arm’s length principle. These drawbacks must be measured against the expected benefits of safe harbours, certainty, and compliance simplicity on the taxpayer’s side and relief from administrative burden on the tax administration’s side.

11. Safe harbours – good practice
Specified margins and methods should be in line with arm’s length conditions
Apply to a tightly defined and clear set of transactions
Taxpayer arm’s length opt-out
Within MAP
Bilateral or multilateral where possible
Aimed at providing certainty and reducing costs, rather than generating revenue

12. Dealing Effectively With the Challenges of Transfer Pricing
See also:
Dealing Effectively With the Challenges of Transfer Pricing
Handbook On Transfer Pricing Risk Assessment (Global Forum on Transfer Pricing) – to be released soon