Two months into his new post as the head of the OECD’s Transfer Pricing Unit at the Centre for Tax Policy and Administration in Paris, Tomas Balco shares his agenda with TP Week
23 October 2017
Tomas Balco brings to the table work experience from the public and private sector, and is known as a consensus builder on both the national and regional level.
Prior to taking up the position at the OECD, Balco was the general state counsel and head of international taxation at the Slovak Republic’s Ministry of Finance between 2014 and 2017.
He has taught taxation courses as an associate professor at KIMEP University in Almaty, Kazakhstan, where he was also the director of the Central Asian Tax Research Centre and served as the chair of tax working groups at the American Chamber of Commerce.
All this bodes well for projects in BEPS areas that remain vague and ambiguous for both tax administrations and multinationals, and are in need of further clarification and application guidelines. He anticipates challenging work on BEPS Action 1 and the digital economy in spring 2018.
As emerging markets are becoming increasingly empowered by transfer pricing methodologies, Balco takes a leadership position at an exciting time and with a pipeline full of capacity-building projects and toolkits, such as the draft toolkit on the taxation of offshore indirect transfers of assets and on transfer pricing documentation, which are to be finalised in the coming months.
TP Week: Do you think the OECD’s work has progressed from a theoretical frontier on transfer pricing to dealing with more mature stages of application?
Tomas Balco: Never before in the history of taxation history has so much happened in such a short time with so many far-reaching implications. The global community – the public sector together with the private sector and NGOs – has worked together and contributed to shaping some significant recommendations that have the potential to address many of the challenges that we have been experiencing in international taxation in the areas of domestic law, tax treaties and transfer pricing.
We are now very much in the practical stage of implementation. We see the BEPS recommendations being implemented both at the domestic and regional levels. The EU is clearly leading the way by adopting most of the BEPS actions at an EU-wide level and thereby creating a level playing field.
The Anti-Tax Avoidance Directives I and II that implement three out of 15 BEPS Actions, Actions 2, 3 and 4, into domestic law are, however, still directives. So we will see how countries cope with implementing these provisions into domestic law. They will need guidance and assistance in the process and both the OECD and the EU will need to cooperate in assuring that countries get it right also at the domestic legal implementation stage of these changes.
Amazing work was done on implementing Actions 6 and 7, as well as elements of other recommendations in form of the Multilateral Convention (MLI). This alone is an incredible milestone.
In transfer pricing, significant progress was made in addressing some of the weaknesses of the system to prevent tax avoidance. Indeed, revisiting and clarifying some of the areas of the Transfer Pricing Guidelines allows tax administrations to find useful tools on how to handle abusive situations arising in transfer pricing. The focus now remains on the practical aspects of implementation of these recommendations, while seeking to assure consistency to prevent situations of double taxation due to different interpretation and application of the guidelines.
TP Week: Which areas of the BEPS project are you looking to promote further?
Balco: There is still quite some work to be done in the area of financial transactions.
A number of countries are also reporting to us the overuse of one-sided methods, which leads to allocation of limited profits in most jurisdictions with significant substantive activities, while observing significant residual profits allocated to entities with very limited functionalities. We receive reports of various transactions taking place in MNE groups, which are very rare or do not even arise between independent parties. These reports may thus create a need for us to explore which areas in the Transfer Pricing Guidelines may require refinement.
There is also the area of BEPS Action 1 and I am awaiting the interim report of the Task Force for Digital Economy in spring 2018 with some anxiety. This task force clearly has a huge challenge ahead of it. If it concludes that more work should be done on the defining of a new nexus to tax activities in the digital economy, this will require the even more challenging exercise for our team to work on methods of profit attribution.
TP Week: In your opinion, what are the fundamental challenges in balancing TP regimes with the needs of the private sector? And how do emerging economies differ in this respect from OECD member countries?
Balco: There is a huge gap in the available transfer pricing resources and capacities in the developed countries and countries in transition or early stages of development. This gap usually works to the detriment of the countries with lesser capacities.
This is already reflected in the legislative framework of many countries that have none or only rudimentary transfer pricing legislation in place. Such legislation may contain gaps and loopholes, which is an invitation for some of the more aggressive tax advisers to exploit them for the benefit of their clients.
In such cases, there is also limited capacity in the tax administration and some parts of our Transfer Pricing Guidelines may be very difficult to read and understand for tax inspectors somewhere in the field.
The combination of the gaps in legislation, divergence from international standards, complexities involved in MNE groups, aggressive tax positions of some taxpayers and limited capacities in tax administrations in some countries are the ingredients that can brew into tensions and aggressive responses from the tax administrations, which may also affect good-faith taxpayers. Furthermore, in combination with the absence of an effective dispute mechanism, this can give a rise to double taxation that can create obstacles for trade and investment.
Where we leave vague and ambiguous guidance in the transfer pricing guidelines, this contributes towards the factors that give rise to tax uncertainty. Very few outside observers realise that these vague and ambiguous parts of the guidelines are the result of the consensus building process, where countries with different views and positions try to agree and negotiate a common international standard. The part, where we succeed in formulating principles is extremely valuable and that is why we should be seeking to gradually replace as much vagueness and ambiguity with a clearer guidance to assist both developing countries and the private sector.
In the coming years we need to focus on assisting developing countries with limited capacities, and explore whether we can develop more simplified guidance. One example are low-value-added services, an area where we should keep trying to develop more pragmatic solutions on how to deal with the complex issues arising in the MNE context.
TP Week: How will your previous work experience shape your agenda? What lessons are you bringing with you from your previous post in the Slovak Republic's Finance Ministry?
Balco: My experience includes work in the private sector and the public sector, as well as academia.
The private sector experience has been very valuable in helping me develop an understanding of different business models and different industries and sectors.
Clearly, our objective as policy makers in taxation is to create an environment where business can flourish, while contributing to sustainable and inclusive growth. At the same time, the objective is to assure that governments have an effective legal and tax administration framework in place to allow them to collect the revenue they need to perform their functions. As you can imagine, our work at the OECD requires us to balance several objectives and that makes our work a fascinating challenge.
The previous lessons learned in the finance ministries are the lessons of being a public servant and official. My work at the OECD is indeed also that of a service.
While working on a national level, the objective was to serve our country and I had to assure that we are getting it right at the national level and for the benefit of our country.
My experience at the EU level was another valuable experience, where we had to explore different options of finding consensus while trying to make things work and getting them right at the regional level.
The work at the OECD is very similar in that we have to strive to accommodate [different stakeholders] and find a balanced solution to get it right and make things work on a global level.
A lot of this work is public service so it comes with challenges that require a degree of humbleness, persistence and keeping focus.
TP Week: What is on the top of your agenda as the new head of TP at the OECD?
Balco: Our main focus is currently on the implementation of BEPS recommendations in the area of transfer pricing and finalising the left-over work from the BEPS project.
In this area, we are working in particular on the implementation guidance on hard-to-value-intangibles, guidance on attribution of profits to permanent establishment (PE) in the context of new PE thresholds resulting from BEPS Action 7, guidance on the application of the transactional profit split method, and we are developing new guidance on financial transactions.
We are also in the process of monitoring the implementation of BEPS recommendations by Inclusive Framework countries and there is preliminary scoping for further work in the area of intra-group services under way.
Part of our work also relates to assistance and evaluation of transfer pricing practices in relation to accession of new OECD members and involvement in capacity building in different regions around the world to assure broader and consistent application of the Transfer Pricing Guidelines.
We are also working together with other international organisations, the IMF, UN and World Bank Group, as partners on the Platform for Collaboration on Tax in developing practical toolkits in different areas. The most recent outcomes were the toolkits for Addressing Difficulties in Accessing Comparables Data for Transfer Pricing Analyses and addressing the gaps on prices of minerals sold in an intermediate form, such as concentrates. The work in progress also includes a draft toolkit on the taxation of offshore indirect transfers of assets and a toolkit on transfer pricing documentation, which are to be finalised in the coming months. Further work in this area will include toolkits on risk assessment and on addressing the tax base erosion payments.
The above article was published on www.tpweek.com on 23 October 2017 and has been republished with the approval of the Publisher.