Cost-based indicators should only be used in those cases where costs are a relevant indicator of the value of the functions performed, assets used and risks assumed by the tested party. In addition, the determination of what costs should be included in the cost base should derive from a careful review of the facts and circumstances of the case. Where the net profit indicator is weighted against costs, only those costs that directly or indirectly relate to the controlled transaction under review (or transactions aggregated in accordance to the principle at paragraphs 3.9-3.12) should be taken into account. Accordingly, an appropriate level of segmentation of a taxpayer’s accounts is needed in order to exclude from the denominator costs that relate to other activities or transactions and materially affect comparability with uncontrolled transactions. Moreover, in most cases only those costs which are of an operating nature should be included in the denominator. The discussion at paragraphs 2.86-2.91 above also applies to costs as denominator.
TPG2017 Chapter II paragraph 2.98
Category: B. Transactional net margin method, OECD Transfer Pricing Guidelines (2017), Part III: Transactional profit method, TPG2017 Chapter II: Transfer Pricing Methods | Tag: Cost-based indicators, Denominator - costs, Net Profit Indicator/Profit Level Indicator (PLI), Relevant costs, Transactional net margin method (TNMM), Transactional profit methods, Transfer pricing methods
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- TPG2022 Chapter II paragraph 2.93The denominator should be focussed on the relevant indicator(s) of the value of the functions performed by the tested party in the transaction under review, taking account of its assets used and risks assumed. Typically, and subject to a review of the facts...
- TPG2022 Chapter II paragraph 2.100Where treating costs as pass-through costs is found to be arm’s length, a second question arises as to the consequences on comparability and on the determination of the arm’s length range. Because it is necessary to compare like with like, if pass-through costs...
- TPG2022 Chapter II paragraph 2.97One question that arises in cases where the net profit indicator is weighted against sales is how to account for rebates and discounts that may be granted to customers by the taxpayer or the comparables. Depending on the accounting standards, rebates and discounts...
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- April 2013: Draft Handbook on Transfer Pricing Risk AssessmentThe 2013 Draft Handbook on Transfer Pricing Risk Assessment is a detailed, practical resource that countries can follow in developing their own risk assessment approaches. The handbook supplements useful materials already available with respect to transfer pricing risk assessment. The OECD Forum on...
Related Case Law
- Spain vs. Microsoft Ibérica S.R.L, February 2018, Audiencia Nacional, Case no 337/2014Microsoft Ibérica S.R.L is responsible for distribution and marketing of Microsoft products in Spain. According to an agreement concluded between Microsoft Ibérica and MIOL (Microsoft’s Irish sales and marketing hub) with effect from 1 July 2003, Microsoft Ibérica would received the largest amount...
- Bulgaria vs “Telecom Bulgaria”, November 2018, Supreme Administrative Court, Case No 13993In 2004, a Management Services Agreement was concluded between Telecom Bulgaria (BTC EAD) and BTC Holding Limited, UK (the Operator), whereby the Operator was entrusted with supporting the overall management activities of the company, including the development and implementation of a general company...
- Bulgaria vs Yazaki Bulgaria Ltd, January 2023, Administrative Court, Case No 22/2022Yazaki Bulgaria Ltd is active in the automotive industry and is part of the Japanese Yazaki Group. It had used the transactional net margin method (TNMM) to demonstrate that prices for the sale of products to related parties were at arm’s length. Following...
- India vs. Sony Ericsson Mobile Communications India Pvt. Ltd., March 2015, Delhi High Court, ITA No.16/2014Sony Ericsson Mobile Communications India Pvt. Ltd. was engaged in distribution and marketing of imported and branded products (mobile phones), manufactured and sold to them by foreign group companies. Intangible rights in the brand-name/ trademark/ trade-name were owned by group parent. The tax...