The framework and detailed guidance for analysing risk laid out in Section D. 1.2.1 of Chapter I is applicable for purposes of undertaking an analysis of risks in the context of business restructurings, and in particular for determining which party assumes a specific risk by reference to control and financial capacity. It is crucial to apply this framework to determine which party assumes specific risks before the restructuring and which party assumes specific risks following the restructuring. For example, where a restructuring purports to transfer inventory risk, it is relevant to examine not only the contractual terms, but also the conduct of the parties under Step 3 in the framework (e.g. where any inventory write-downs are taken before and after the restructuring, whether there is any indemnification for those inventory write-downs, which party or parties perform risk control functions and have the financial capacity to assume the risks). The results of this analysis may establish that before the restructuring one party assumed the inventory risk and that same party continues to do so after the restructuring notwithstanding a change in contractual terms. In that situation, the risk would continue to be allocated to that same party. References in this Chapter to “transfer of risk”, “relocation of risk, “shifting of risk” or “laying off of risk” should be read in the context of the guidance in Section D. 1 of Chapter I. In particular, the transferee of the risk is considered to assume the risk when the conditions set out in the framework for analysing risk in controlled transactions (Section D. 1.2.1 of Chapter I) are met.
TPG2017 Chapter IX paragraph 9.20
Category: B. Understanding the concept itself, OECD Transfer Pricing Guidelines (2017), Part I Arm's length compensation for the restructuring itself, TPG2017 Chapter IX: Transfer Pricing Aspects of Business Restructurings | Tag: Business restructuring, Delineation of Business Restructurings, Laying off of risk, Relocation of risk, Shifting of risk, Transfer of risk
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- TPG2022 Chapter IX paragraph 9.21A second example relates to the purported transfer of credit risk as part of a business restructuring. The analysis under Section D. 1.2.1 of Chapter I would take into account the contractual terms before and after the restructuring, but would also examine how...
- TPG2022 Chapter IX paragraph 9.22In any analysis of risks in controlled transactions, one important issue is to assess whether a risk is economically significant, i.e. it carries significant profit potential, and, as a consequence, whether that risk may explain a significant reallocation of profit potential. The significance...
- TPG2022 Chapter IX paragraph 9.44Take the example of a conversion of a full-fledged manufacturer into a contract manufacturer. In such a case, while a cost plus reward might be an arm’s length remuneration for undertaking the post-restructuring contract manufacturing operations, a different question is whether there should...
- TPG2022 Chapter IX paragraph 9.20The framework and detailed guidance for analysing risk laid out in Section D. 1.2.1 of Chapter I is applicable for purposes of undertaking an analysis of risks in the context of business restructurings, and in particular for determining which party assumes a specific...
- TPG2022 Chapter IX paragraph 9.55Transfers of intangibles or rights in intangibles raise difficult questions both as to the identification of the intangibles transferred and as to their valuation. Identification can be difficult because not all valuable intangibles are legally protected and registered and not all valuable intangibles...
- TPG2022 Chapter IX paragraph 9.24Some businesses have indicated that multinational businesses, regardless of their products or sectors, have reorganised their structures to provide more centralised control and management of manufacturing, research and distribution functions. The pressure of competition in a globalised economy, savings from economies of scale,...
- TPG2022 Chapter IX paragraph 9.109Post-restructuring arrangements may pose certain challenges with respect to the identification of potential comparables in cases where the restructuring implements a business model that is hardly found between independent enterprises. It should be noted that the mere fact that an arrangement is not...
- TPG2022 Chapter IX paragraph 9.91A similar issue may arise in the case where a party has undertaken development efforts resulting in losses or low returns in the early period and above-normal returns are expected in periods following the termination of the contract. In such a case, it...
- OECD releases text of the new MLC to Implement Amount A of Pillar One11 October 2023 the OECD/G20 Inclusive Framework has released the text of a new multilateral convention that updates the international tax framework to co-ordinate a reallocation of taxing rights to market jurisdictions, improve tax certainty, and remove digital service taxes. The Multilateral Convention to...
- 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...
Related Case Law
- Denmark vs H Group, April 2019, Tax Tribunal, Case No. SKM2019.207.LSRIntangibles had been transferred from a Danish subsidiary to a US parent under a written agreement. According to the agreement the Danish subsidiary – which had developed and used it’s own intangibles – would now have to pay royalties for the use of...
- Portugal vs “B Restructuring LDA”, February 2021, CAAD, Case No 255/2020-TB Restructuring LDA was a distributor within the E group. During FY 2014-2016 a number of manufacturing entities within the group terminated distribution agreements with B Restructuring LDA and subsequently entered into new Distribution Agreements, under similar terms, with another company of the...
- Germany vs “Cutting Tech GMBH”, November 2019, FG Munich, Case No 6 K 1918/16Due 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...
- Poland vs R. Group, September 2018, Administrative Court, Case No III SA/Wa 263/18R. Sp. z o.o. had requested a binding ruling/interpretation regarding tax deduction for the price paid to a related entity under restructuring. The request was denied by the tax authorities, as the question – according to the authorities – could only be answered...