TPG2017 Chapter II Annex II example 7

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34. Company L, a resident of Country L, and Company M, a resident of Country M, are part of an MNE group, LM Corporation. Companies L and M offer international trade facilitation, freight forwarding and customs broking services to unrelated customers. Together, Companies L and M, provide customers with services including receipt of goods in the exporting country, customs clearance in the exporting country, containerisation, organising shipment of the container, delivery of containers to and from the ship, de-containerisation, customs clearance in the importing country, and delivering the goods to their destination. Customers may be importers or exporters and Companies L and M facilitate imports and exports from both countries. Customers typically pay for these services based on a combination of the volume and weight of the goods.
35. The accurate delineation of the transaction determines that Companies L and M perform the same trade facilitation, freight forwarding and customs broking services jointly in a highly integrated manner. Companies L and M are highly dependent on each other for the successful completion of each transaction with a customer. Companies L and M also perform similar marketing and customer relationship functions, depending on the location of the customer. Companies L and M jointly use an integrated goods-tracking IT system. The system was initially purchased jointly by Companies L and M from an unrelated supplier. Companies L and M each make incremental improvements to the system where possible. LM Corporation’s value proposition to its customers lies in its competitive pricing, which is made possible by its efficiency and economies of scale and scope, and its seamless integration across international boundaries.
36. Companies L and M jointly perform the same key value-adding functions and jointly use and contribute to the MNE group’s most important assets. Although arm’s length pricing for their joint activities is readily available, their operations are highly integrated and interdependent such that it is not possible to use a one-sided method to determine an arm’s length outcome for either of their respective contributions. In this case, therefore, it is likely that a transactional profit split will be the most appropriate method of determining the arm’s length compensation due to Companies L and M.
37. If Companies L and M also share the assumption of the economically significant risks associated with the transactions, a profit split of actual profits is likely to be appropriate.

 






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