BEPS and Commodity Trading - The size of your footprint

Learning Centre • BEPS and Commodity Trading - The size of your footprint

BEPS and Commodity Trading - The size of your footprint

To a large extent, the analysis may be driven by questions about people, functions, and risks. This is on the basis that people perform functions, there are risks associated with functions and the assumption of risk drives the entitlement to reward and hence profit, which should be attributed to the PE in a particular jurisdiction. This is a somewhat crude description of the analysis required since there are factors (such as the assumption of capital risk, which is not necessarily driven by the presence of people) that should also be taken into account when allocating profit across a value chain.

Back in July of 2016, the OECD released a report on a discussion draft under the new guidance on transfer pricing risk assessment. The discussion draft did not suggest a considerable change to the text of the guidance on which a profit should be attributed, but it hinted at a potentially lowered profit attribution threshold.

This draft is open for stakeholder input until September 5 2016, and it will be interesting to see whether the OECD decides to lower the threshold on what constitutes a PE, which will then lead to further scrutiny as to whether or not each jurisdiction decides to adopt this standard. It will be important to watch the movement of this issue over the next few months, as it could reveal who is going to enforce the BEPS project’s standards.

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Outcomes for commodity traders are likely to be negative overall, regardless of this guidance moving forward. However, commodity traders that endeavor to expand their relationships further upstream and downstream of the bilateral point are likely to find themselves in a more challenging position. With new tax climate, commodity traders may also reconsider the appropriateness of trade terms (e.g. Incoterms) being used to transact with customers in particular jurisdictions or for the same customer in multiple jurisdictions (e.g. where it relates to a global procurement contract with a MNC food manufacturer) as well as evaluate their local presence in various jurisdictions in the context of the assumption of:

risks associated with the ability to locate a source of supply that is capable of delivering the commodity to the export point
inventory risk and inventory ownership
merchant settlement accountability
risks associated with marketing and distributing the commodity to buyers
credit risk and economic ownership of receivables or common-law principles and;
capital risk

As an added local footprint promotes a perception of substantial economic activity, which may give rise to both direct and indirect tax nexus in that jurisdiction.

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