TPG2017 Chapter I paragraph 1.57

Category: D. Guidance for applying the arm's length principle, OECD Transfer Pricing Guidelines (2017), TPG2017 Chapter I: The Arm's Length Principle | Tag: , , , ,
« | »

Risk is inherent in business activities. Enterprises undertake commercial activities because they seek opportunities to make profits, but those opportunities carry uncertainty that the required resources to pursue the opportunities either will be greater than expected or will not generate the expected returns. Identifying risks goes hand in hand with identifying functions and assets and is integral to the process of identifying the commercial or financial relations between the associated enterprises and of accurately delineating the transaction or transactions.






Related Guidelines

  1. TPG2022 Chapter I paragraph 1.58The assumption of risks associated with a commercial opportunity affects the profit potential of that opportunity in the open market, and the allocation of risks assumed between the parties to the arrangement affects how profits or losses resulting from the transaction are allocated...
  2. TPG2022 Chapter I paragraph 1.61In this section references are made to terms that require initial explanation and definition. The term “risk management” is used to refer to the function of assessing and responding to risk associated with commercial activity. Risk management comprises three elements: (i) the capability...
  3. TPG2022 Chapter I paragraph 1.63Risk management is not the same as assuming a risk. Risk assumption means taking on the upside and downside consequences of the risk with the result that the party assuming a risk will also bear the financial and other consequences if the risk...
  4. TPG2022 Chapter I paragraph 1.56A functional analysis is incomplete unless the material risks assumed by each party have been identified and considered since the actual assumption of risks would influence the prices and other conditions of transactions between the associated enterprises. Usually, in the open market, the...
  5. TPG2022 Chapter I paragraph 1.34The typical process of identifying the commercial or financial relations between the associated enterprises and the conditions and economically relevant circumstances attaching to those relations requires a broad-based understanding of the industry sector in which the MNE group operates (e.g. mining, pharmaceutical, luxury...
  6. TPG2022 Chapter I paragraph 1.52The actual contributions, capabilities, and other features of the parties can influence the options realistically available to them. For example, an associated enterprise provides logistics services to the group. The logistics company is required to operate warehouses with spare capacity and in several...
  7. TPG2022 Chapter I paragraph 1.83 (Example 1)Company A seeks to pursue a development opportunity and hires a specialist company, Company B, to perform part of the research on its behalf. Under step 1 development risk has been identified as economically significant in this transaction, and under step 2 it...
  8. TPG2022 Chapter I paragraph 1.51In transactions between two independent enterprises, compensation usually will reflect the functions that each enterprise performs (taking into account assets used and risks assumed). Therefore, in delineating the controlled transaction and determining comparability between controlled and uncontrolled transactions or entities, a functional analysis...
  1. July 2018: Transfer Pricing Practices in the Oil Sector, and their Potential Application to MiningIn July 2018 Center for Global Development published a study of special transfer pricing practices in the oil sector, and their potential application to hard rock minerals. According to the study, governments of mining countries are vulnerable to investors manipulating transfer prices as...
  2. July 2017: ATO guidance on related party financing arrangementsThe Practical Compliance Guideline (Guideline) from the ATO outlines the compliance approach to the taxation outcomes associated with a ‘financing arrangement’, as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997), or a related transaction or contract, entered into...

Related Case Law

  1. India vs Toyota Kirloskar Auto Parts Private Limited, March 2020, Income Tax Appellate Tribunal – BANGALORE, Case No IT(TP) No.1915/Bang/2017 & 3377/Bang/2018Toyota Kirloskar Auto Parts Private Limited manufactures auto parts and sold them to Toyota Kirloskar Motors Limited, another Indian corporation in the Toyota Group. In FY 2013-14 Toyota Kirloskar Auto Parts Private Limited paid a 5% royalty to the Japanese parent Toyota Motor Corporation...
  2. India vs. Quark Systems Pvt. Ltd. Oct 2014, ITA No.282Quark Systems Pvt. is engaged in providing customer support services on behalf of the Quark Group. TNMM had been applied as the most appropriate method for determining arm’s length income. In an audit, the tax administration rejected one of the companies selected as a comparable on the basis that...
  3. Netherlands vs “Dutch Low Risk Treasury B.V.”, August 2003, District Court, Case No 01/04083, ECLI:NL:GHAMS:2003:AJ6865This case concerns a Dutch treasury company with a low risk intra-group borrowing and on-lending activity. The interested party was incorporated on 5 August 1995 by a legal person named V Limited, under Canadian law. Its subscribed and paid-up capital amounted to NLG...
  4. Spain vs. Zeraim Iberica SA, June 2018, Audiencia Nacional, Case No. ES:AN:2018:2856ZERAIM IBERICA SA, a Spanish subsidiary in the Swiss Syngenta Group (that produces seeds and agrochemicals), had first been issued a tax assessment relating to fiscal years 2006 and 2007 and later another assessment for FY 2008 and 2009 related to the arm’s...