TPG2017 Chapter I paragraph 1.59

Category: D. Guidance for applying the arm's length principle, OECD Transfer Pricing Guidelines (2017), TPG2017 Chapter I: The Arm's Length Principle | Tag: , , , , ,
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This section provides guidance on the nature and sources of risk relevant to a transfer pricing analysis in order to help identify relevant risks with specificity. In addition, this section provides guidance on risk assumption under the arm’s length principle. The detailed guidance provided in this section on the analysis of risks as part of a functional analysis covering functions, assets, and risks, should not be interpreted as indicating that risks are more important than functions or assets. The relevance of functions, assets and risks in a specific transaction will need to be determined through a detailed functional analysis. The expanded guidance on risks reflects the practical difficulties presented by risks: risks in a transaction can be harder to identify than functions or assets, and determining which associated enterprise assumes a particular risk in a transaction can require careful analysis.






Related Guidelines

  1. TPG2022 Chapter I paragraph 1.84 (Example 2)Company B manufactures products for Company A. Under step 1 capacity utilisation risk and supply chain risk have been identified as economically significant in this transaction, and under step 2 it has been established that under the contract Company A assumes these risks....
  2. 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...
  3. TPG2022 Chapter I paragraph 1.82In this step the functions in relation to risk of the associated enterprises that are parties to the transaction are analysed. The analysis provides information about how the associated enterprises operate in relation to the assumption and management of the specific, economically significant...
  4. TPG2022 Chapter I paragraph 1.81The assumption of risk has a significant effect on determining arm’s length pricing between associated enterprises, and it should not be concluded that the pricing arrangements adopted in the contractual arrangements alone determine which party assumes risk. Therefore, one may not infer from...
  5. TPG2022 Chapter I paragraph 1.80However, it does not follow that every contractual exchange of potentially higher but riskier income for lower but less risky income between associated enterprises is automatically arm’s length. The rest of the steps set out in this section describe the information required to...
  6. TPG2022 Chapter I paragraph 1.79It is economically neutral to take on (or lay off) risk in return for higher (or lower) anticipated nominal income as long as the net present value of both options are equal. Between unrelated parties, for example, the sale of a risky income-producing...


Related Case Law

  1. Panama vs “Petroleum Wholesale Corp”, September 2020, Administrative Tribunal, Case No TAT-RF-062“Petroleum Wholesale Corp” is engaged in the wholesale of petroleum products, accessories and rolling stock in general in Panama. Following a thorough audit carried out by the Tax Administration in Panama, where discrepancies and inconsistencies had been identified between the transfer pricing documentation...
  2. India vs Quark Systems Pvt. Ltd. Oct 2014, Income Tax Appellate Tribunal, ITA No. 282/Del/2012Insilco is engagedengaged in the business of manufacturing and sale of silica. The TNMM had been applied as the most appropriate method for determining arm’s length income. Following an audit, the tax administration rejected the TNMM and instead applied a CUP method. An...
  3. European Commission vs Amazon and Luxembourg, May 2021, European General Court, Case No T-816/17 and T-318/18In 2017 the European Commission concluded that Luxembourg granted undue tax benefits to Amazon of around €250 million. Following an in-depth investigation the Commission concluded that a tax ruling issued by Luxembourg in 2003, and prolonged in 2011, lowered the tax paid by...
  4. Latvia vs SIA „RPM”, May 2013, Administrative District Court, A420496211 (A-00305-13/7)The tax authority (SRS) had disregarded the TP method chosen by the taxpayer and performed its own TP analysis which showed that the income had been below the 1. quartile, and on that basis an assessment of additional taxable income was issued. Judgment...
  5. Panama vs Puma Energy Bahamas SA, June 2024, Supreme Court, N° 849112020Puma Energy Bahamas SA is engaged in the wholesale of petroleum products, accessories and rolling stock in general in Panama. Following a thorough audit carried out by the Tax Administration in Panama, where discrepancies and inconsistencies had been identified between the transfer pricing...