Third, 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 increase the reliability of the results of a comparability analysis.32 In some cases, if exceptional costs arising from COVID-19 may be accounted for as either operating or non-operating items by different taxpayers in different transactions, then comparability adjustments may be In other cases there can be differences in whether the COVID-19 related costs are taken into account above or below the gross profit line. For instance, the recognition of the purchase of PPE as an operating cost by the tested party and as a cost of goods sold by a comparable may have a significant impact when computing a profit level indicator based on gross profit and may require a comparability adjustment.
OECD COVID-19 TPG paragraph 54
Category: TPG2020 Guidance on the transfer pricing implications of the COVID-19 | Tag: Above or below the gross profit line, Accounting consistency, Comparability adjustments, Comparability analysis, Comparable cost basis, COVID-19, COVID-19 specific 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 53Second, 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...
- 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 28This aspect is also relevant in performing the comparability analysis. For instance, assume government intervention forces a taxpayer to close its distribution facilities for three months. In undertaking a benchmark analysis, care should be taken in verifying that comparable enterprises have faced similar...
- 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 57Where one party to a controlled transaction seeks to invoke force majeure, the agreement and underlying legal framework within which force majeure may be invoked should form the starting point of a transfer pricing analysis. It cannot be automatically assumed that where a...
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...
- Romania vs “Electrolux” A. SA, November 2020, Supreme Court, Case No 6059/2020In this case, a Romanian manufacturer and distributor (A. SA) in the Electrolux group (C) had been loss making while the group as a whole had been profitable. The tax authorities issued an assessment, where the profit of A. SA had been determined...
- 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...
- Panama vs Banana S.A., June 2023, Administrative Tribunal, Case No TAT-RF-048Banana S.A. sold bananas to related parties abroad. These transactions were priced using the TNMM method and the result of the benchmark analysis was an interquartile range of ROTC from 0.71% to 11.09%. However, Banana S.A. had continuous losses and for 2016 its...
- Hungary vs “Electronic components Manufacturing KtF”, June 2023, Supreme Court, Case No Kfv.V.35.415/2022/7“Electric Component Manufacturing KtF” is a Hungarian subsidiary of a global group that distributes electronic components in more than 150 countries worldwide. The tax authorities had conducted a comprehensive tax audit of the Hungarian company for the period from 1 October 2016 to...