Where an arrangement between associated enterprises replaces an existing arrangement (restructuring), there may be factual differences in the starting position of the restructured entity compared to the position of a newly set up operation. Sometimes, the post-restructuring arrangement is negotiated between parties that have had prior contractual and commercial relationships. In such a situation, depending on the facts and circumstances of the case and in particular on the rights and obligations derived by the parties from these prior arrangements, this may affect the options realistically available to the parties in negotiating the terms of the new arrangement and therefore the conditions of the restructuring and of the post-restructuring arrangements (see paragraphs 9.27-9.31 for a discussion of options realistically available in the context of determining the arm’s length compensation for the restructuring itself). For instance, assume a party has proved in the past to be able to perform well as a full-fledged distributor performing a whole range of marketing and selling functions, employing and developing valuable marketing intangible assets and assuming a range of risks associated with its activity such as inventory risks, bad debt risks and market risks. Assume that its distribution contract is re-negotiated and converted into a “limited risk distribution” contract whereby it will perform limited marketing activities under the supervision of a foreign associated enterprise, employ limited marketing intangibles and assume limited risks in its relationship with the foreign associated enterprise and customers. In such a situation, the restructured distributor would not be in the same position as a newly established distributor.
TPG2017 Chapter IX paragraph 9.102
Category: A. Business restructuring versus "structuring", OECD Transfer Pricing Guidelines (2017), TPG2017 Chapter IX: Transfer Pricing Aspects of Business Restructurings | Tag: Business restructuring, Conversion of full-fledged distributors, Limited Risk Distributors (LRD), Options realistically available, Post Restructuring Remuneration
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- TPG2022 Chapter IX paragraph 9.103Where there is an ongoing business relationship between the parties before and after the restructuring, there may also be an inter-relationship between on the one hand the conditions of the pre-restructuring activities and/or of the restructuring itself, and on the other hand the...
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- TPG2022 Chapter IX paragraph 9.121The analysis of the business before and after the restructuring may reveal that while some functions, assets and risks were transferred, other functions may still be carried out by the “stripped” entity. Typically, as part of the restructuring the entity may have been...
- TPG2022 Chapter IX paragraph 9.107The same remarks and questions apply for other types of restructurings, including other types of restructuring of sales activities as well as restructurings of manufacturing activities, research and development activities, or other services activities....
- TPG2022 Chapter IX paragraph 9.105When one compares a situation where a long-established full-fledged distributor is converted into a limited risk distributor with a situation where a limited risk distributor has been in existence in the market for the same duration, there might also be differences because the...
- TPG2022 Chapter IX paragraph 9.16In order to determine whether, at arm’s length, compensation would be payable upon a restructuring to any restructured entity within an MNE group, and if so the amount of such compensation as well as the member of the group that should bear such...
- OECD COVID-19 TPG paragraph 40In determining whether or not a “limited-risk” entity may incur losses, the risks assumed by an entity will be particularly important. This reflects the fact that at arm’s length, the allocation of risks between the parties to an arrangement affects how profits or...
- 2019: ATO draft on compliance approach to the arm’s length debt testThe draft Guideline provides guidance to entities in applying the arm’s length debt test in Division 820 of the Income Tax Assessment Act 19972 and should be read in conjunction with draft Taxation Ruling TR 2019/D2 Income tax: thin capitalisation – the arm’s...
- 2017: ATO transfer pricing issues related to centralised operating modelsThe Practical Compliance Guideline (Guideline) sets out the Australian Taxation Office’s (ATO’s) compliance approach to transfer pricing issues related to the location and relocation of certain business activities and operating risks into a centralised operating model. The type of activities commonly centralised include...
Related Case Law
- India vs. Mitsui & Co. India Pvt. Ltd., August 2015, ITA No. 6463 & 5082/Del/2011Mitsui & Co., an Indian subsidiary in a Japanese multinational trading group, was involved in trade support activities which it performed to the benefit of the Japanese parent. The Indian subsidiary provided business support services for a wide range of products. These controlled...
- Sweden vs Absolut Company AB, June 2019, Supreme Administrative Court, Case no 1913-18The Absolut Company AB had been issued an assessment of additional taxable income of SEK 247 mio. The assessment was based on the position that (1) The Absolut Company AB had been selling below the arm’s length price to an US group company –...
- Germany vs “Cutting Tech GMBH”, November 2019, FG Munich, Case No 6 K 1918/16 (BFH Pending – I R 54/19)Due to the economic situation of automotive suppliers in Germany in 2006, “Cutting Tech GMBH” established a subsidiary (CB) in Bosnien-Herzegovina which going forward functioned as a contract manufacturer. CB did not develop the products itself, but manufactured them according to specifications provided...
- Korea vs “Semicon-Distributor”, May 2021, Seoul High Court, Case No 2020누61166A Korean subsidiary in the “Semiconductor-group” was active in distribution and sales services. At issue was which transfer pricing method was the most appropriate for determining the arm’s length remuneration for these activities in FY 2013. Judgement of the Court The Court dismissed...