Andrew J. Casley, Szymon Wlazlowski, and Rebecca E. Somerville, PwC UK

Elizabeth A. Sweigart, PwC US


Largely in light of actions implementing the Organisation for Economic Co-operation and Development (OECD) Action Plan on Base Erosion and Profit Shifting (BEPS), the global tax structures of oil and gas (O&G) companies currently have been receiving significant attention from both governments and the media around the world.

Originally published in July 2013, the BEPS plan includes proposals addressing several areas of critical importance to O&G companies and raises questions whether the established intercompany pricing methodologies and mechanisms they have established—also known as transfer pricing—will continue to be respected from a tax perspective.

Of particular relevance to O&G companies, an OECD discussion draft issued at the end of 2014 (the Draft), for the first time in the OECD’s history, focuses solely on the sales of commodities within multinational groups. The OECD has stated that the purpose of this work is to align recent developments in the tax treatment of these transactions—especially in commodity-dependent developing countries which are not OECD members—with the existing and long-recognized transfer pricing methods enumerated in the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines).

Aligning different pricing approaches taken by developing countries with the existing OECD Guidelines will become more important given that recent price decreases could be expected to put more pressure on governments to minimize the consequent impact on their tax receipts. As illustrated below, oil revenues are a significant part of many countries’ total gross domestic product (GDP).

Source: PwC (2015), Fit for $50 oil in Africa - Will the boom go bust? Available at:$50-oil-05-updated.pdf

Although the OECD does not have authority to enact laws, it performs an important thought leadership and co-ordination role on international tax policies. Its guidance generally is regarded as persuasive in countries that are not members and many countries—including both member and non-member states—already have signaled intent to conform to final guidance issued by the OECD. The Draft therefore offers an early insight into the potential approach of tax authorities around the globe to groups that undertake commodity-related intercompany transactions. Accordingly, it is important that O&G companies take actions now given the wide-ranging potential implications for their businesses as a result of the recommendations in the Draft.


The key takeaway from the Draft is the reconciliation between two seemingly different approaches: a prescriptive approach increasingly employed by tax authorities in some countries—essentially calculating the tax base with reference to the market quotations for a particular commodity, known to transfer pricing professionals as the ‘Sixth Method’—and the five methods prescribed under the OECD Guidelines.

The OECD Draft seems to reflect a view that the ‘Sixth Method’ is, or in many cases can be seen as, a variant of the OECD’s long-preferred Comparable Uncontrolled Price (CUP) method. Essentially, the OECD is planning to endorse the use of ‘adjusted CUPs’ pursuant to which quoted market prices would be adjusted for quality, geography, and a number of other factors. The current wording of the Draft essentially indicates that this would be the only appropriate method to be used for pricing the sale of commodities within a group when suitable quoted prices are available.

At first glance, this approach may seem reasonable—as it should limit the scope for arbitrary applications of unilateral pricing methods. However, commodity transactions often are complex, and businesses typically execute their transfer pricing in a more flexible way than merely by reference to simple spot market transactions. Much depends, therefore, on how prescriptive the OECD rules would be and whether, in fact, they would reflect real-world pricing.

Recognition of the need to adjust reference prices for economically significant factors likely will be welcomed by taxpayers. However, taking into account the limited experience and resources that may be available to tax authorities in some commodity-dependent developing countries, there is concern that the adjustments applied might not be appropriate or might not reflect certain industry practices, as described in representations already made to the OECD by industry participants.

The Draft seeks to address this point, while at the same time potentially providing guidance to tax authorities, by acknowledging that comparability adjustments to the quoted prices may be required to account for physical differences in the product, different specifications, freight, processing costs, and other factors, and, moreover, that these adjustments may be both large or complex or both. The OECD is examining in detail the nature and type of adjustments—for instance, in the recently circulated mineral pricing survey that was sent to a number of governments in order to understand the types of adjustments made to copper, iron ore, and gold pricing.

At the same time, if the result is to impose use of external pricing methods, the OECD would be limiting the scope for using different methods (e.g., profit splits) or applying internal comparables where relevant. If national rules are overly prescriptive, a taxpayer potentially could be prevented from using its own data on the choice of reference prices, quotation period, or adjustments that companies use in third-party situations. As a result, potentially valid data could be ignored, possibly resulting in a non-arm’s-length price.

Deemed pricing date

The Draft also singles out for particular attention the challenges faced by tax authorities in verifying the pricing date used (i.e., the day from which the reference quote should be taken from the market), especially if the commodities-related contract allows for optionality in fixing the pricing date—rather than committing to a fixed date or other measure, such as rolling or month average market prices. The outcome results in the conflation of two potential key issues.

First, there is a suggestion that sometimes the pricing date used by related parties may be inconsistent with their behavior (i.e., ‘cherry-picking’ of dates). In these situations, the OECD suggests adoption of a deemed pricing date for controlled commodity transactions, meaning that tax administrations may impute a date (e.g., the date of actual shipment).

Such an attempt to introduce a one-size-fits-all approach to pricing does not, for instance, distinguish between spot transactions—which for hydrocarbons often are priced on the day of shipment—and term contracts—which typically will be the case for related-party transactions—which often will use month averages (e.g., month average of delivery, prior month average) or another quotation period triggered by observable events (e.g., set number of days before or after the date of bill of lading).

The second issue is that industry practice varies depending on the commodity and the type of transaction. In fact, certain commodities such as electricity are most likely to need to be explicitly excluded from being priced at delivery, while the specifics of other activities (e.g., pricing of optionality around the delivery dates or price risk management through physical storage that actually protects the tax base in the long-term through reducing price volatility) will have to be accounted for through means other than the choice of the pricing date (e.g., by comparability adjustments).

Similarly to the choice of reference prices described above, the possibility that some tax authorities might impose the deemed pricing date without any agreed-to safeguards—even if limited to certain circumstances—introduces another layer of complexity and uncertainty into what is already a challenging subject.

Documenting transactions

In terms of compliance, the Draft specifies that taxpayers should document the appropriateness of intercompany pricing by presenting details of the application of market data—including the formulae used. Considering that such details—especially the pricing formulae—typically vary between commodities and markets and could be confidential or commercially sensitive, O&G professionals are likely to be concerned by the prospect of having to collate these data points for numerous transactions and the possibility that such information might be shared inappropriately.

Another concern for O&G professionals may be a need to explain the minute details of market pricing—for example, does the CUP price correspond to bid, ask, mid-point, or settle—and the details of pricing methodology—for example, can the actual price be tested against market using interquartile ranges or rather other measures of volatility, such as the statistical distribution of prices.

A final concern would be that some tax authorities might engage in selectivity in terms of choosing transactional benchmarks and potentially make inconsistent adjustments between periods.

The way forward

It should be noted that the Draft is a discussion document and therefore subject to revision, taking into account numerous comments received from tax professionals and industry participants.

Although the level of detail that will be set forth in the final guidance is not known at this time, businesses should take proactive steps to determine their level of preparedness to meet the anticipated new challenges posed by the BEPS Action Plan and should develop practical strategies to address any observed gaps, either in their pricing methodology or in their current documentation. If taxpayers are not using available reference prices to support their intercompany prices, consideration should be given whether this approach remains appropriate. Alternatively, where reference prices are used, the emphasis should be on looking at the terms (e.g., quotational periods, choice of appropriate reference price, and adjustments).

Many commodity-dependent developing countries are not members of the OECD. Some of these countries may decide only to adopt certain aspects of the OECD guidance. Despite this uncertainty, there is no doubt that the focus of tax authorities on O&G companies will continue to increase, especially in light of the current economic conditions in global commodity markets.

About the authors

Andrew J. Casley, Szymon Wlazlowski and Rebecca E. Somerville are with PricewaterhouseCoopers LLP, the UK firm of the PwC network of member firms. Elizabeth A. Sweigart is with PricewaterhouseCoopers LLP, the US firm of the PwC network of member firms. Casley has more than two decades of experience as a tax and transfer pricing adviser across Europe in a range of different industries. Wlazlowski is an energy economist specializing in transfer pricing for energy and utilities clients. Somervilleis a member of the transfer pricing practice based in London. Sweigart has nearly 15 years of transfer pricing, tax controversy and project management experience primarily in the oil and gas industry. Learn more about PwC.