If there are differences between the controlled and uncontrolled transactions that would affect price, adjustments should be made to the price of the uncontrolled transaction according to the comparability provisions of § 1.482-1(d)(2). Specific examples of the factors that may be particularly relevant to this method include – (1) Quality of the product; (2) Contractual terms (e.g., scope and terms of warranties provided, sales or purchase volume, credit terms, transport terms); (3) Level of the market (i.e., wholesale, retail, etc.); (4) Geographic market in which the transaction takes place; (5) Date of the transaction; (6) Intangible property associated with the sale; (7) Foreign currency risks; and (8) Alternatives realistically available to the buyer and seller ...

The degree of comparability between controlled and uncontrolled transactions is determined by applying the provisions of § 1.482-1(d). Although all of the factors described in § 1.482-1(d)(3) must be considered, similarity of products generally will have the greatest effect on comparability under this method. In addition, because even minor differences in contractual terms or economic conditions could materially affect the amount charged in an uncontrolled transaction, comparability under this method depends on close similarity with respect to these factors, or adjustments to account for any differences. The results derived from applying the comparable uncontrolled price method generally will be the most direct and reliable measure of an arm’s length price for the controlled transaction if an uncontrolled transaction has no differences with the controlled transaction that would affect the price, or if there are only minor differences that have a definite and reasonably ascertainable effect on price and for which appropriate adjustments are made. If such adjustments cannot be made, or if there are more than minor differences between the controlled and uncontrolled transactions, the comparable uncontrolled price method may be used, but the reliability of the results as a measure of the arm’s length price will be reduced. Further, if there are material product differences for which reliable adjustments cannot be made, this method ordinarily will not provide a reliable measure of an arm’s length result ...

A Polish company, “Shopping Centre Lender sp.k.”, had been granted three intra group loans in FY 2013 for a maximum amount of EUR 2 million, EUR 115 million and EUR 43.5 million. The interest rate on the loans had been set at 9%. The tax authorities found that the 9% interest rate was higher than the arm’s length rate, and issued an assessment where the interest rate had been lowered to 3.667%, resulting in lower interest expenses and thus additional taxable income. “Shopping Centre Lender sp.k.” filed an appeal with the Administrative Court claiming that the procedure for estimating income – determining the arm’s length interest rate – had not been conducted correctly by the tax authority. In a judgement issued in May 2019 (no. III SA/Wa 1777/18) the Administrative Court issued a judgement in favour of the company. An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Supreme Administrative Court upheld the decision of the Administrative Court and dismissed the appeal of the tax authorities. Excerpts “In the opinion of the Supreme Administrative Court, the Court of First Instance made a proper assessment of the case submitted to its review. In the justification of the contested judgment, it presented the legal basis for the decision and its explanation, and within this framework it diagnosed the infringements committed by the authority and assessed their impact on the results of the case. It did so in a clear manner which makes it possible to review the grounds on which it was based. The conclusions formulated, as well as the objections to the proceedings conducted and the content of the decision concluding them, were presented in a reliable and comprehensive manner, in mutual confrontation of the state of the case, applicable legal norms and case-law. It indicated which provisions had been violated, which allegations of the complaint it considered justified and why. In the present case, the essence of the dispute essentially boiled down to determining whether the interest rate (9% p.a.) of the three loans concluded in 2013 for a maximum amount of EUR 2 million, EUR 115 million and EUR 43.5 million (in respect of which the total balance of liabilities as at 30 September 2014 amounted to almost PLN 623 million), which were granted to the Applicant by a related entity, was in line with market conditions, i.e. whether independent, rational entities would have agreed on an interest rate of that amount under comparable conditions. More generally, however, the issue in the case oscillated around so-called transfer pricing and generally – in view of the arguments now raised by the parties – boiled down to an assessment of whether, in fact, the procedure for estimating income [art. 11 of the AOP] had been conducted correctly, as the authority argued, or, as the Appellant and the Court argued, in breach of the provisions of the Act and the Ordinance.” “Referring in turn to the individual problems diagnosed by the WSA, it should be pointed out that this Court, taking into account the disposition arising from the content of Article 11(1) of the A.p.d.o.p., rightly emphasised that its application (in order to determine the income of a given entity and the tax due) requires a prior analysis of comparability. In order to determine what conditions would be set between independent entities, it is necessary to determine what transactions concluded by independent entities are comparable to the transaction assessed from the point of view of Article 11(1) of the A.l.t.d.o.p., which requires a prior comparability analysis. Such an analysis is always conducted, as it serves the purpose of determining whether the prerequisite for estimating income (and the tax due) under Article 11(1) of the A.l.t.c. has been fulfilled. This conclusion is also confirmed by the above-mentioned § 6(1) of the Ordinance, The comparability analysis precedes the assessment, regardless of the method of assessment that would ultimately be applied. On the other hand, § 21 of the Ordinance (Chapter 5) indicates how to estimate income in the case of the specific benefits specified therein (loan or credit). One must agree with the Court of First Instance that the application of Article 11(1) of the A.P.C. requires a prior comparability analysis in respect of the loans in question. A properly conducted comparability analysis should consist of the steps listed in § 6(4) of the Ordinance and establish the relevant comparability factors (§ 21(3) of the Ordinance, which uses the term “relevant circumstances relating to a particular case”) arising from § 6(3) and § 21(3) of the Ordinance.” “The point is that it is not a matter of carrying out any comparability analysis, but rather one consisting precisely of the steps listed in § 6(4) of the Ordinance and establishing the relevant comparability factors arising from § 6(3) and § 21(3) of the Ordinance. As the Court of First Instance aptly pointed out, § 6(4) lists the consecutive stages comprising the comparability analysis, of which the first two in particular include – a general analysis of information concerning the taxpayer and its economic environment (stage one) and an analysis of the terms and conditions established or imposed between related parties, in particular on the basis of the functions they perform, the assets involved and the risks incurred, as a result of which economically relevant factors in the circumstances of the case under review should be identified (stage two). In the realities of this case, the Court of First Instance correctly held that the authority, in its decision issued pursuant to Article 11(1) of the A.p.d.o.p. – taking into account the aforementioned provisions of the Ordinance – in carrying out the comparability analysis was obliged to carry out the individual stages and identify the relevant comparability factors, and this should have been appropriately reflected in the wording of the decision. And although one has to agree with the authority that the Regulation does not indicate the necessity of drawing up the analysis in the ...

After identifying the relevant transactions involving intangibles, specifically identifying the intangibles involved in those transactions, identifying which entity or entities legally own the intangibles as well as those that contribute to the value of the intangibles, it should be possible to identify arm’s length conditions for the relevant transactions. The principles set out in Chapters I – III of these Guidelines should be applied in determining arm’s length conditions for transactions involving intangibles. In particular, the recommended nine-step process set out in paragraph 3.4 can be helpful in identifying arm’s length conditions for transactions involving intangibles. As an essential part of applying the principles of Chapter III to conduct a comparability analysis under the process described in paragraph 3.4, the principles contained in Sections A, B, and C of this Chapter VI should be considered ...

While some separately contracted transactions between associated enterprises may need to be evaluated together in order to determine whether the conditions are arm’s length, other transactions contracted between such enterprises as a package may need to be evaluated separately. An MNE may package as a single transaction and establish a single price for a number of benefits such as licences for patents, know-how, and trademarks, the provision of technical and administrative services, and the lease of production facilities. This type of arrangement is often referred to as a package deal. Such comprehensive packages would be unlikely to include sales of goods, however, although the price charged for sales of goods may cover some accompanying services. In some cases, it may not be feasible to evaluate the package as a whole so that the elements of the package must be segregated. In such cases, after determining separate transfer pricing for the separate elements, the tax administration should nonetheless consider whether in total the transfer pricing for the entire package is arm’s length ...

Another example where a taxpayer’s transactions may be combined is related to portfolio approaches. A portfolio approach is a business strategy consisting of a taxpayer bundling certain transactions for the purpose of earning an appropriate return across the portfolio rather than necessarily on any single product within the portfolio. For instance, some products may be marketed by a taxpayer with a low profit or even at a loss, because they create a demand for other products and/or related services of the same taxpayer that are then sold or provided with high profits (e.g. equipment and captive aftermarket consumables, such as vending coffee machines and coffee capsules, or printers and cartridges). Similar approaches can be observed in various industries. Portfolio approaches are an example of a business strategy that may need to be taken into account in the comparability analysis and when examining the reliability of comparables. See paragraphs 1.134-1.138 on business strategies. However, as discussed in paragraphs 1.149-1.151, these considerations will not explain continued overall losses or poor performance over time. Moreover, in order to be acceptable, portfolio approaches must be reasonably targeted as they should not be used to apply a transfer pricing method at the taxpayer’s company-wide level in those cases where different transactions have different economic logic and should be segmented. See paragraphs 2.84-2.85. Finally, the above comments should not be misread as implying that it would be acceptable for one entity within an MNE group to have a below arm’s length return in order to provide benefits to another entity of the MNE group, see in particular paragraph 1.150 ...

Ideally, in order to arrive at the most precise approximation of arm’s length conditions, the arm’s length principle should be applied on a transaction-by-transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. Examples may include: a) some long-term contracts for the supply of commodities or services, b) rights to use intangible property, and c) pricing a range of closely-linked products (e.g. in a product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing of manufacturing know-how and the supply of vital components to an associated manufacturer; it may be more reasonable to assess the arm’s length terms for the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm’s length method. A further example would be the routing of a transaction through another associated enterprise; it may be more appropriate to consider the transaction of which the routing is a part in its entirety, rather than consider the individual transactions on a separate basis. See example 26 of the Annex I to Chapter VI ...

The review of the controlled transaction(s) under examination aims at identifying the relevant factors that will influence the selection of the tested party (where needed), the selection and application of the most appropriate transfer pricing method to the circumstances of the case, the financial indicator that will be tested (in the case of a transactional profit method), the selection of comparables and where relevant the determination of comparability adjustments ...

The “broad-based analysis” is an essential step in the comparability analysis. It can be defined as an analysis of the industry, competition, economic and regulatory factors and other elements that affect the taxpayer and its environment, but not yet within the context of looking at the specific transactions in question. This step helps understand the conditions in the taxpayer’s controlled transaction as well as those in the uncontrolled transactions to be compared, in particular the economic circumstances of the transaction (see paragraphs 1.130-1.133) ...

See paragraph 3.82 for a discussion of a process to establish, monitor and review transfer prices ...

In practice, this process is not a linear one. Steps 5 to 7 in particular might need to be carried out repeatedly until a satisfactory conclusion is reached, i.e. the most appropriate method is selected, especially because the examination of available sources of information may in some instances influence the selection of the transfer pricing method. For instance, in cases where it is not possible to find information on comparable transactions (step 7) and/or to make reasonably accurate adjustments (step 8), taxpayers might have to select another transfer pricing method and repeat the process starting from step 4 ...

Below is a description of a typical process that can be followed when performing a comparability analysis. This process is considered an accepted good practice but it is not a compulsory one, and any other search process leading to the identification of reliable comparables may be acceptable as reliability of the outcome is more important than process (i.e. going through the process does not provide any guarantee that the outcome will be arm’s length, and not going through the process does not imply that the outcome will not be arm’s length). Step 1: Determination of years to be covered. Step 2: Broad-based analysis of the taxpayer’s circumstances. Step 3: Understanding the controlled transaction(s) under examination, based in particular on a functional analysis, in order to choose the tested party (where needed), the most appropriate transfer pricing method to the circumstances of the case, the financial indicator that will be tested (in the case of a transactional profit method), and to identify the significant comparability factors that should be taken into account. Step 4: Review of existing internal comparables, if any. Step 5: Determination of available sources of information on external comparables where such external comparables are needed taking into account their relative reliability. Step 6: Selection of the most appropriate transfer pricing method and, depending on the method, determination of the relevant financial indicator (e.g. determination of the relevant net profit indicator in case of a transactional net margin method). Step 7: Identification of potential comparables: determining the key characteristics to be met by any uncontrolled transaction in order to be regarded as potentially comparable, based on the relevant factors identified in Step 3 and in accordance with the comparability factors set forth at Section D.1 of Chapter I. Step 8: Determination of and making comparability adjustments where appropriate. Step 9: Interpretation and use of data collected, determination of the arm’s length remuneration ...

This case deals with arm’s length remuneration of a Greek Diary Distributor. Following an audit of “Diary Distributor Ltd.”, the Greek tax authorities determined that the prices paid to related parties for FY 2017 had been above the arm’s length price. On that basis an upwards adjustment of the taxable income was issued. An appeal was filed by “Diary Distributor Ltd.” Judgement of the Court The court dismissed the appeal of “Diary Distributor Ltd.” and upheld the assessment of the tax authorities Click here for English translation Click here for other translation ...

A foreign group had transferred funds to one of its branches, Perupetro, in Peru and claimed that the transfer was a capital contribution – and not a loan. Following an audit the tax authorities issued an assessment, where the funds transferred were considered a loan and withholding taxes on the interest payments had been lifted. An appeal was filed by Perupetro. Perupetro held that the transfers of funds made by its non-domiciled parent company in its favour in the financial year 2014 constitute assigned capital (capital contributions) and not loans as considered by the Administration. It pointed out that the tax authorities has not followed the procedure established by the Income Tax Law and the OECD Guidelines to delineate the operation observed, a situation that would have allowed it to note that it does not qualify as a loan. Perupetro further claimed that the tax authorities had not carried out a correct comparability analysis for the transaction subject to assessment, i.e. a proper comparison of the transaction under examination with a transaction carried out between independent parties under the same or similar conditions, in accordance with the provisions of paragraph d) of article 32-A of the Income Tax Law and article 110 of the regulations of the aforementioned law, in order to establish the market value of the interest rate agreed between the appellant and its related party in the 2014 financial year. Judgement of the Tax Court The Tax Court sets aside the assessment and decided in favour of Perupetro. Excerpts ” From the evaluation carried out, it can be seen that the Administration carried out the analysis of some of the characteristics applicable to the case in question, as considered in article 110 of the Income Tax Law Regulations; However, it is noted that it has not taken into account some other elements of the operation that are relevant in order to establish a comparable financial transaction and that may have an impact on the setting of the interest rate to be charged, such as the solvency of the debtor and the risk rating, elements considered by paragraph d) of article 32-A of the Income Tax Law and paragraph a) of numeral 1 of article 110 of the regulations of the aforementioned law. In this regard, it has not been proven that the Administration had carried out a correct comparability analysis for the transaction subject to assessment, i.e. a proper comparison of the transaction under examination with a transaction carried out between independent parties under the same or similar conditions, in accordance with the provisions of paragraph d) of article 32-A of the Income Tax Law and article 110 of the regulations of the aforementioned law, in order to establish the market value of the interest rate agreed between the appellant and its related party in the 2014 financial year. That in accordance with the foregoing, the objection of the Administration is not duly substantiated, and it is therefore appropriate to lift it and, consequently, revoke the appealed ruling and annul the contested determination ruling.” Click here for English Translation Click here for other translation ...

This case deals with arm’s length pricing of limited risk manufacturing services. Following an audit of the X Ltd, the prices paid to a foreign manufacturer in the group was determined by the Grees tax authorities to have been above the arm’s length price. On that basis an upwards adjustment of the taxable income of X Ltd. was issued. Judgement of the Court The court dismissed the appeal of the X Ltd. Since the audit findings as recorded in the partial income tax audit report of the Head of the C.E.M.E.P. dated 08/07/2020 are found to be valid, thorough and fully substantiated, the present appeal must be dismissed. Click here for English translation Click here for other translation ...

At issue in this case was the remuneration of a Polish manufacturing subsidiary in an international group dealing in the production and sale of metal packaging for food products, including beverage cans, food cans, household cans and metal lids for jars etc. The Polish tax authorities had issued an tax assessment for FY 2009 – 2012 based on a TNMM benchmark study where financial results of comparable independent manufactures operating in the packaging industry showed that the the Polish manufacturing site had underestimated revenues obtained from the sale of goods to related entities The Court of first instance held in favor of the tax authorities. The case was then brought before the Administrative Court of Appeal. In the Court’s view, the authorities did not subject the case to thorough verification in accordance with the legal standards on which the decision was based – including, in particular, the analysis of comparable transactions (CUP’s). In the Court’s opinion, the authorities have illegally equated the fact of the loss achieved by the applicant with the data resulting from the general financial ratios for the entire activity of the applicant in 2013. The economic rationality of the transaction should be assessed, in the opinion of the Court, through the prism of the benefit that a specific entity may obtain from the transaction and not in relation to general financial ratios of the compared entities covering the entirety of their activity for a given year. For as long as the tax authority does not prove that the difference in price conditions was only for the purpose of tax avoidance and did not result from economic conditions, the abovementioned Article 11 cannot be applied (cf. glossary to the judgment of the Supreme Court of 22 April 1999, Case No III RN 184/98, OSP 2000, No 5, p. 264). Click here for translation ...

A transfer pricing method is applied for the purpose of determining the price of a controlled transaction. Methods acknowledge by the OECD The five methods approved by the OECD are the comparable uncontrolled price (CUP) method, resale price method (RPM), cost plus method (CPM), transactional net margin method (TNMM) and the transactional profit split method (TPSM). OECD also acknowledge use of methods applying techniques used by independent parties for price setting (e.g. valuation techniques for pricing transfers of business assets and credit ratings for determining interest payment). Under narrowly defined circumstances special transfer pricing methods can be applied for simplification purposes according to the OECD Transfer Pricing Guidelines (e.g. the simplified method for LVAS and bilaterally agreed Safe Harbors). At the outer boundary of the arm’s length principle, transfer pricing methods are applied to minimise tax avoidance. This includes the HTVI guidance, the so called sixth method used for commodity transactions, and the group rating approach for setting interest rates on inter-company loans. Pricing methods outside the arm’s length principle include formulary apportionment, industry averages and use of rules of thumb. The Process of Pricing Controlled Transactions Consider the materiality of the transaction vs. the administrative burden and the purpose for pricing the transaction – pricing at the time of the transaction, retrospective price testing, tax assessment, MAP/APA or risk assessment purposes. This is relevant for the overall approach and thoroughness of the pricing exercise. Read the terms and conditions of the agreement and then make an effort to get a full understanding of the true nature/substance of the transaction (or the combined/aggregated transactions), the parties to the transaction and the circumstances under which the transaction has been agreed . Then read the terms of the written agreement again and compare – delineation (what is the real deal). Is remuneration of the transaction included in other transactions. Are there tax incentives for mis-characterizing and/or -pricing the transaction (e.g. low tax jurisdictions) Search for pricing data on comparable transactions – internal, external, historical and other useful information related to pricing of similar transactions. Consider if segregation or aggregation of transactions is needed. Select the most appropriate transfer pricing method – choice of tested party, profit level indicator, use of more than one  method for complex transactions Find the information needed to apply the chosen transfer pricing method – benchmark study, comparability adjustments, financial data, cost base, relevant profit, splitting factor, cash flow, credit rating etc. If the method is based on comparable transactions diagnostic ratios (e.g. turnover compared to costs, profit per employee) may need to be checked? Determine the price of the transaction. Verifying Compliance with the Arm’s Length Principle The last step in the process of pricing a transaction is testing that the price arrived at is in accordance with the arm’s length principle. How is the combined profit from the transaction ultimately shared between the parties and does it reasonably reflect the functions, assets and risk of the parties in relation to the transaction? Will the parties each have a separate benefit from the transaction – are both parties better of by engaging in the transaction taking into account their options realistically available? Is the transaction commercially rational for both parties? If the answer to any of those three questions is – NO – the pricing exercise will have to be revisited. Illustration of Transfer Pricing Methods ...

A Polish company, “Shopping Centre Lender sp.k.”, had been granted three intra group loans in FY 2013 for EUR 2 million, EUR 115 million and EUR 43.5 million. The interest rate on the loans had been set at 9%. The tax authorities found that the 9% interest rate was higher than the arm’s length rate and carried out its own analysis on the basis of the comparative data from 66 transactions. In addition, data posted on the internet on the website of the National Bank of Poland was consulted. The summary showed that in the aforementioned period, the average interest rates applied by Polish financial institutions for loans granted to enterprises in EUR ranged from 2.4% to 3.6%. Furthermore, by letters in April 2017 the tax authorities requested information from domestic financial institutions regarding the interest rates and commission rates for loans granted to commercial companies in the period from June 2013 to September 2014. The information received showed that the interest rates applied by the banks were set as the sum of: the EURIBOR base rate (usually three months) and the bank’s margin. Between June 2013 and September 2014, interest rates varied and ranged from 0.515% to 6.50%. On the basis of the information received an assessment was issued where the interest rate on the three inter group loans had been lowered from 9% to 3.667% resulting in lower interest expenses and thus additional taxable income. Shopping Centre Lender sp.k. filed an appeal with the Administrative Court claiming that the procedure for estimating income – determining the arm’s length interest rate – had not been followed correctly by the tax authority. Judgement of the Administrative Court The Administrative Court issued a judgement in favour of Shopping Centre Lender sp.k. The Court found that the tax authorities procedure for estimating income had been in breach of the provisions of the Act and the Ordinance on transfer pricing adjustments. Click here for English Translation Click here for other translation ...

After identifying the relevant transactions involving intangibles, specifically identifying the intangibles involved in those transactions, identifying which entity or entities legally own the intangibles as well as those that contribute to the value of the intangibles, it should be possible to identify arm’s length conditions for the relevant transactions. The principles set out in Chapters I – III of these Guidelines should be applied in determining arm’s length conditions for transactions involving intangibles. In particular, the recommended nine-step process set out in paragraph 3.4 can be helpful in identifying arm’s length conditions for transactions involving intangibles. As an essential part of applying the principles of Chapter III to conduct a comparability analysis under the process described in paragraph 3.4, the principles contained in Sections A, B, and C of this Chapter VI should be considered ...

While some separately contracted transactions between associated enterprises may need to be evaluated together in order to determine whether the conditions are arm’s length, other transactions contracted between such enterprises as a package may need to be evaluated separately. An MNE may package as a single transaction and establish a single price for a number of benefits such as licences for patents, know-how, and trademarks, the provision of technical and administrative services, and the lease of production facilities. This type of arrangement is often referred to as a package deal. Such comprehensive packages would be unlikely to include sales of goods, however, although the price charged for sales of goods may cover some accompanying services. In some cases, it may not be feasible to evaluate the package as a whole so that the elements of the package must be segregated. In such cases, after determining separate transfer pricing for the separate elements, the tax administration should nonetheless consider whether in total the transfer pricing for the entire package is arm’s length ...

Another example where a taxpayer’s transactions may be combined is related to portfolio approaches. A portfolio approach is a business strategy consisting of a taxpayer bundling certain transactions for the purpose of earning an appropriate return across the portfolio rather than necessarily on any single product within the portfolio. For instance, some products may be marketed by a taxpayer with a low profit or even at a loss, because they create a demand for other products and/or related services of the same taxpayer that are then sold or provided with high profits (e.g. equipment and captive aftermarket consumables, such as vending coffee machines and coffee capsules, or printers and cartridges). Similar approaches can be observed in various industries. Portfolio approaches are an example of a business strategy that may need to be taken into account in the comparability analysis and when examining the reliability of comparables. See paragraphs 1.114-1.118 on business strategies. However, as discussed in paragraphs 1.129-1.131, these considerations will not explain continued overall losses or poor performance over time. Moreover, in order to be acceptable, portfolio approaches must be reasonably targeted as they should not be used to apply a transfer pricing method at the taxpayer’s company-wide level in those cases where different transactions have different economic logic and should be segmented. See paragraphs 2.84-2.85. Finally, the above comments should not be misread as implying that it would be acceptable for one entity within an MNE group to have a below arm’s length return in order to provide benefits to another entity of the MNE group, see in particular paragraph 1.130 ...

Ideally, in order to arrive at the most precise approximation of arm’s length conditions, the arm’s length principle should be applied on a transaction-by-transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. Examples may include: a) some long-term contracts for the supply of commodities or services, b) rights to use intangible property, and c) pricing a range of closely-linked products (e.g. in a product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing of manufacturing know-how and the supply of vital components to an associated manufacturer; it may be more reasonable to assess the arm’s length terms for the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm’s length method. A further example would be the routing of a transaction through another associated enterprise; it may be more appropriate to consider the transaction of which the routing is a part in its entirety, rather than consider the individual transactions on a separate basis. See example 26 of the Annex to Chapter VI ...

The review of the controlled transaction(s) under examination aims at identifying the relevant factors that will influence the selection of the tested party (where needed), the selection and application of the most appropriate transfer pricing method to the circumstances of the case, the financial indicator that will be tested (in the case of a transactional profit method), the selection of comparables and where relevant the determination of comparability adjustments ...

The “broad-based analysis” is an essential step in the comparability analysis. It can be defined as an analysis of the industry, competition, economic and regulatory factors and other elements that affect the taxpayer and its environment, but not yet within the context of looking at the specific transactions in question. This step helps understand the conditions in the taxpayer’s controlled transaction as well as those in the uncontrolled transactions to be compared, in particular the economic circumstances of the transaction (see paragraphs 1.110-1.113) ...

See paragraph 3.82 for a discussion of a process to establish, monitor and review transfer prices ...

In practice, this process is not a linear one. Steps 5 to 7 in particular might need to be carried out repeatedly until a satisfactory conclusion is reached, i.e. the most appropriate method is selected, especially because the examination of available sources of information may in some instances influence the selection of the transfer pricing method. For instance, in cases where it is not possible to find information on comparable transactions (step 7) and/or to make reasonably accurate adjustments (step 8), taxpayers might have to select another transfer pricing method and repeat the process starting from step 4 ...

Below is a description of a typical process that can be followed when performing a comparability analysis. This process is considered an accepted good practice but it is not a compulsory one, and any other search process leading to the identification of reliable comparables may be acceptable as reliability of the outcome is more important than process (i.e. going through the process does not provide any guarantee that the outcome will be arm’s length, and not going through the process does not imply that the outcome will not be arm’s length). Step 1: Determination of years to be covered. Step 2: Broad-based analysis of the taxpayer’s circumstances. Step 3: Understanding the controlled transaction(s) under examination, based in particular on a functional analysis, in order to choose the tested party (where needed), the most appropriate transfer pricing method to the circumstances of the case, the financial indicator that will be tested (in the case of a transactional profit method), and to identify the significant comparability factors that should be taken into account. Step 4: Review of existing internal comparables, if any. Step 5: Determination of available sources of information on external comparables where such external comparables are needed taking into account their relative reliability. Step 6: Selection of the most appropriate transfer pricing method and, depending on the method, determination of the relevant financial indicator (e.g. determination of the relevant net profit indicator in case of a transactional net margin method). Step 7: Identification of potential comparables: determining the key characteristics to be met by any uncontrolled transaction in order to be regarded as potentially comparable, based on the relevant factors identified in Step 3 and in accordance with the comparability factors set forth at Section D.1 of Chapter I. Step 8: Determination of and making comparability adjustments where appropriate. Step 9: Interpretation and use of data collected, determination of the arm’s length remuneration ...

Following an audit the tax authorities issued an assessment, where the interest rate on a loan had been changed based on application of transfer pricing rules. An appeal was filed by “Holding S.A.” arguing that the transfer pricing rules do not apply to the loan operations observed, since there has not been a lower payment of income tax as required by paragraph a) of article 32-A of the aforementioned tax law, This is also not verified by having obtained losses in the years 2000 to 2005, since being a holding company and only receiving income from dividends, such losses cannot be carried forward, in addition to the fact that the only effect of the objection formulated is to reduce the loss and not to determine a higher tax payable. Judgement of the Tax Court The Tax Court sets aside the assessment and decided in favour Holding S.A. Excerpts “In this sense, it has not been proven that the Administration had carried out a due comparison of the same or similar transactions in order to correctly establish the market value of the transactions analysed in application of the transfer pricing rules, specifically, in accordance with the provisions of paragraph d) of article 32°-A of the Income Tax Law. Consequently, the objection raised by the Administration should be lifted, and the appealed decision should be revoked and the contested resolutions of determination should be annulled, as well as the fines applied. Click here for English Translation Click here for other translation ...

“Below is a description of a typical process that can be followed when performing a comparability analysis. This process is considered an accepted good practice but it is not a compulsory one, and any other search process leading to the identification of reliable comparables may be acceptable as reliability of the outcome is more important than process (i.e. going through the process does not provide any guarantee that the outcome will be arm’s length, and not going through the process does not imply that the outcome will not be arm’s length). Step 1: Determination of years to be covered. Step 2: Broad-based analysis of the taxpayer’s circumstances. Step 3: Understanding the controlled transaction(s) under examination, based in particular on a functional analysis, in order to choose the tested party (where needed), the most appropriate transfer pricing method to the circumstances of the case, the financial indicator that will be tested (in the case of a transactional profit method), and to identify the significant comparability factors that should be taken into account. Step 4: Review of existing internal comparables, if any. Step 5: Determination of available sources of information on external comparables where such external comparables are needed taking into account their relative reliability. Step 6: Selection of the most appropriate transfer pricing method and, depending on the method, determination of the relevant financial indicator (e.g. determination of the relevant net profit indicator in case of a transactional net margin method). Step 7: Identification of potential comparables: determining the key characteristics to be met by any uncontrolled transaction in order to be regarded as potentially comparable, based on the relevant factors identified in Step 3 and in accordance with the comparability factors set forth at paragraphs 1.38-1.63. Step 8: Determination of and making comparability adjustments where appropriate. Step 9: Interpretation and use of data collected, determination of the arm’s length remuneration.” ...