Second, when determining a cost basis, it will be important to consider whether the basis should include or exclude exceptional costs that are deemed to relate to the controlled transactions (determination noted above), and, if included in the costs basis, whether such costs should or should not be treated as pass-through costs to which no profit element should be attributed (see paragraph 2.99 of the OECD TPG). Including exceptional costs in the cost basis would transfer these costs to the counterparty, whereas excluding them would have the effect of allocating them to the tested party. Therefore, in determining which approach is most appropriate, it will be important to consider at arm’s length which party to the controlled transaction would have borne these additional costs, which should in turn be informed by the accurate delineation of the transaction.31
OECD COVID-19 TPG paragraph 53
Category: TPG2020 Guidance on the transfer pricing implications of the COVID-19 | Tag: Accounting consistency, Comparability analysis, Comparable cost basis, COVID-19, COVID-19 specific costs, Exceptional costs, Losses
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Next » Related Guidelines
- OECD COVID-19 TPG paragraph 52First, exceptional costs should generally be excluded from the net profit indicator except when those costs relate to the controlled transaction as accurately delineated.29 The exclusion of exceptional costs must be done consistently at the level of the tested party and the comparables...
- OECD COVID-19 TPG paragraph 54Third, adjustments for accounting consistency may be required to improve comparability. Adjustments for accounting consistency are designed to eliminate the effect of differing accounting practices between the controlled and uncontrolled transactions and should be considered if and only if they are expected to...
- OECD COVID-19 TPG paragraph 51When performing a comparability analysis, it may be necessary to specifically consider how exceptional costs arising from COVID-19 should be taken into account....
- OECD COVID-19 TPG paragraph 34During the COVID-19 pandemic, many MNE groups have incurred losses due to a decrease in demand, inability to obtain or supply products or services or as a result of exceptional, non-recurring operating costs.17 The allocation of losses between associated entities can give rise...
- OECD COVID-19 TPG paragraph 36Second, it will be necessary to consider how exceptional, non-recurring operating costs arising as a result of COVID-19 should be allocated between associated parties.19 These costs should be allocated based on an assessment of how independent enterprises under comparable circumstances operate. Separately, as...
- OECD COVID-19 TPG paragraph 50At arm’s length, exceptional costs may or may not be passed on (wholly or partially) to customers or suppliers depending on who has the responsibility to bear such costs and (including in cases in which such responsibility is not expressly provided for) the...
Related Case Law
- Poland vs “Blueberry Factory” Sp z.o.o., June 2018, Supreme Administrative Court, II FSK 1665/16In this case there were family, capital and personal ties between the Blueberry Factory and its shareholders, and the terms and conditions of the Company’s transactions with its shareholders (purchase of blueberry fruit) had not been at arm’s length. The higher prices paid...
- Italy vs Prinoth S.p.A., December 2022, Supreme Administrative Court, Case No 36275/2022Prinoth S.p.A. is an Italian manufacturer of snow groomers and tracked vehicles. For a number of years the parent company had been suffering losses while the distribution subsidiaries in the group had substantial profits. Following an audit the tax authorities concluded that the...