OECD COVID-19 TPG paragraph 41

Category: TPG2020 Guidance on the transfer pricing implications of the COVID-19 | Tag: , , , , , , , ,
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When considering the risks assumed by a party to a controlled transaction, tax administrations should carefully consider the commercial rationale for any purported change in the risks assumed by a party before and after the outbreak of COVID-19 (and taking into consideration the accurate delineation of such purported change). In particular, concerns may arise where before the outbreak of COVID-19 a taxpayer argues that a “limited-risk†distributor did not assume any marketplace risk and hence was only entitled to a low return, but after the outbreak argues that the same distributor assumes some marketplace risk (for example, due to changes in risk management functions) and hence should be allocated In this scenario, consideration should be given to re-examining whether prior to the outbreak of COVID-19 the “limited-risk†distributor genuinely did not assume any marketplace risk, whether after the outbreak the “limited risk†distributor did not actually assume any marketplace risk, and/or whether the assumption of this risk following the outbreak of COVID-19 is a result of a business restructuring. If a prior risk allocation is recognised under an accurate delineation, in order for a reallocation of that risk to be recognised under a subsequent updated accurate delineation, such new risk allocation must be supported by an analysis of all the facts and circumstances and relevant evidence should be obtained and documented to substantiate the position. In this respect, the guidance in Chapter IX of the OECD TPG may be relevant. In general, consideration should be given to whether a taxpayer is taking inconsistent positions pre- and post- pandemic and, if so, whether either position is consistent with the accurate delineation of the transaction.






Related Guidelines

  1. OECD COVID-19 TPG paragraph 39In all circumstances it will be necessary to consider the specific facts and circumstances when determining whether a so-called “limited-risk†entity could incur losses at arm’s length. This is reflected in the OECD TPG which states that “simple or low risk functions in...
  2. OECD COVID-19 TPG paragraph 80The receipt of government assistance may reduce the quantitative negative impact of a risk. For instance, a party assuming credit risk could expect to incur losses from a transaction due to financial difficulties of its counterparty. However, the counterparty may in fact be...
  3. OECD COVID-19 TPG paragraph 37Finally, the COVID-19 pandemic has created conditions in which associated parties may consider whether they have the option to apply force majeure clauses, revoke or otherwise revise their intercompany agreements. This may impact the allocation of losses and COVID-19 specific costs between associated...
  4. OECD COVID-19 TPG paragraph 38When performing transfer pricing analyses, the activities performed by an entity may lead it to be characterised as “limited-risk†where it has a relatively lower level of functions and risks. 20 Though the term “limited-risk†is commonly used, since the term is not...
  5. 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....
  6. 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...
  7. TPG2022 Chapter IX paragraph 9.106Where a restructuring involves a transfer to a foreign associated enterprise of risks that were previously assumed by a taxpayer, it may be important to examine whether the transfer of risks only concerns the future risks that will arise from the post-restructuring activities...
  8. 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...
  1. July 2017: ATO guidance on related party financing arrangementsThe Practical Compliance Guideline (Guideline) from the ATO outlines the compliance approach to the taxation outcomes associated with a ‘financing arrangement’, as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997), or a related transaction or contract, entered into...
  2. Israel – Guidance on Limited Risk Distribution – Circular 12/2018Circular on transfer pricing – profitability rates and ranges for certain transactions – Limited Risk Distributors (LRDs)  ...

Related Case Law

  1. 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...
  2. Netherlands vs “Car B.V.”, 28 June 2002, Supreme Court, Case No 36446, ECLI:NL:HR:2002:AE4718In this case a Dutch subsidiary of a Japanese car group incurred losses related to import and sales of a specific car model. However in total the car importer remained profitable. The tax authorities claimed that the purchase price of the specific car...
  3. Greece vs “Agri Ltd”, july 2020, Court, Case No A 1514A Greek MNE Group, “Agri Ltd”, was active and specialised in wholesale trade of agricultural machinery, parts and tools. In 2012 a German company was established by the group to distribute products in the Central European region. The pricing of the goods sold...
  4. France vs. Microsoft, Feb 2012, CCA, No 10VE00752In the Microsoft case, the distribution activity of a French subsidiary of an American group was transferred to its Irish sister company. The French subsidiary was then converted into a sales agent of the Irish subsidiary. The Commission rate earned by the French...