Tag: Compliance issues

TPG2022 Chapter III paragraph 3.83

Small to medium sized enterprises are entering into the area of transfer pricing and the number of cross-border transactions is ever increasing. Although the arm’s length principle applies equally to small and medium sized enterprises and transactions, pragmatic solutions may be appropriate in order to make it possible to find a reasonable response to each transfer pricing case ...

TPG2022 Chapter III paragraph 3.82

It is a good practice for taxpayers to set up a process to establish, monitor and review their transfer prices, taking into account the size of the transactions, their complexity, level of risk involved, and whether they are performed in a stable or changing environment. Such a practical approach would conform to a pragmatic risk assessment strategy or prudent business management principle. In practice, this means that it may be reasonable for a taxpayer to devote relatively less effort to finding information on comparables supporting less significant or less material controlled transactions. For simple transactions that are carried out in a stable environment and the characteristics of which remain the same or similar, a detailed comparability (including functional) analysis may not be needed every year ...

TPG2022 Chapter III paragraph 3.81

When undertaking a comparability analysis, there is no requirement for an exhaustive search of all possible relevant sources of information. Taxpayers and tax administrations should exercise judgment to determine whether particular comparables are reliable ...

TPG2022 Chapter III paragraph 3.80

One question that arises when putting the need for comparability analyses into perspective is the extent of the burden and costs that should be borne by a taxpayer to identify possible comparables and obtain detailed information thereon. It is recognised that the cost of information can be a real concern, especially for small to medium sized operations, but also for those MNEs that deal with a very large number of controlled transactions in many countries. Paragraph 4.28 and Chapter V contain explicit recognition of the need for a reasonable application of the requirement to document comparability ...

TPG2017 Chapter III paragraph 3.83

Small to medium sized enterprises are entering into the area of transfer pricing and the number of cross-border transactions is ever increasing. Although the arm’s length principle applies equally to small and medium sized enterprises and transactions, pragmatic solutions may be appropriate in order to make it possible to find a reasonable response to each transfer pricing case ...

TPG2017 Chapter III paragraph 3.82

It is a good practice for taxpayers to set up a process to establish, monitor and review their transfer prices, taking into account the size of the transactions, their complexity, level of risk involved, and whether they are performed in a stable or changing environment. Such a practical approach would conform to a pragmatic risk assessment strategy or prudent business management principle. In practice, this means that it may be reasonable for a taxpayer to devote relatively less effort to finding information on comparables supporting less significant or less material controlled transactions. For simple transactions that are carried out in a stable environment and the characteristics of which remain the same or similar, a detailed comparability (including functional) analysis may not be needed every year ...

TPG2017 Chapter III paragraph 3.81

When undertaking a comparability analysis, there is no requirement for an exhaustive search of all possible relevant sources of information. Taxpayers and tax administrations should exercise judgment to determine whether particular comparables are reliable ...

TPG2017 Chapter III paragraph 3.80

One question that arises when putting the need for comparability analyses into perspective is the extent of the burden and costs that should be borne by a taxpayer to identify possible comparables and obtain detailed information thereon. It is recognised that the cost of information can be a real concern, especially for small to medium sized operations, but also for those MNEs that deal with a very large number of controlled transactions in many countries. Paragraph 4.28 and Chapter V contain explicit recognition of the need for a reasonable application of the requirement to document comparability ...

TPG2010 Chapter IX paragraph 9.58

The fact that a business restructuring may be motivated by anticipated synergies does not necessarily mean that the profits of the MNE group will effectively increase after the restructuring. It may be the case that enhanced synergies make it possible for the MNE group to derive additional profits compared to what the situation would have been in the future if the restructuring had not taken place, but there may not necessarily be additional profits compared to the pre-restructuring situation, for instance if the restructuring is needed to maintain competitiveness rather than to increase it. In addition, expected synergies do not always materialise – there can be cases where the implementation of a global business model designed to derive more group synergies in fact leads to additional costs and less efficiency ...

TPG2010 Chapter IX paragraph 9.57

Business representatives who participated in the OECD consultation process explained that multinational businesses, regardless of their products or sectors, increasingly needed to reorganize their structures to provide more centralized control and management of manufacturing, research and distribution functions. The pressure of competition in a globalised economy, savings from economies of scale, the need for specialization and the need to increase efficiency and lower costs were all described as important in driving business restructuring. Where anticipated synergies are put forward by a taxpayer as an important business reason for the restructuring, it would be a good practice for the taxpayer to document, at the time the restructuring is decided upon or implemented, what these anticipated synergies are and on what assumptions they are anticipated. This is a type of documentation that is likely to be produced at the group level for non-tax purposes, to support the decision-making process of the restructuring. For Article 9 purposes, it would be a good practice for the taxpayer to document how these anticipated synergies impact at the entity level in applying the arm’s length principle. Furthermore, while anticipated synergies may be relevant to the understanding of a business restructuring, care must be taken to avoid the use of hindsight in ex post analyses (see paragraph 3.74) ...

TPG2010 Chapter IX paragraph 9.56

In the absence of evidence of rights and obligations in a comparable situation, it may be necessary to determine what rights and obligations would have been put in place had the two parties transacted with each other at arm’s length. In making such an evaluation, care must be taken to avoid the use of hindsight (see paragraph 3.74) ...

TPG2010 Chapter IX paragraph 9.55

Obviously, any evaluation of the rights and obligations of the restructured entity must be based upon the requirement that those rights and obligations reflect the economic principles that generally govern relationships between independent enterprises (see paragraphs 1.52 and 1.53). For example, a restructured entity may legally be under a short term or “at will†contractual arrangement at the time of the restructuring. However, the actual conduct of the entity in the years or decades prior to the restructuring may be indicative of a longer-term arrangement, and hence greater rights than those indicated by the legal contractual arrangement ...

TPG2010 Chapter IX paragraph 9.54

In order to determine the arm’s length compensation payable upon a restructuring to any restructured entity within an MNE group, as well as the member of the group that should bear such compensation, it is important to identify the transaction or transactions occurring between the restructured entity and one or more other members of the group. This analysis will typically include an identification of the functions, assets and risks before and after the restructuring. It may be important to perform an evaluation of the rights and obligations of the restructured entity under the pre- restructuring arrangement (including in relevant circumstances those existing under contract and commercial law) and of the manner and extent to which those rights and obligations change as a result of the restructuring. (See paragraph 1.11.) ...

TPG2010 Chapter IX paragraph 9.53

Restructurings can take a variety of different forms and may involve only two or more than two members of an MNE group. For example, a simple pre-restructuring arrangement could involve a full- fledged manufacturer producing goods and selling them to an associated full-fledged distributor for on-sale into the market. The restructuring could involve a modification to that two-party arrangement, whereby the distributor is converted to a limited risk distributor or commissionnaire, with risks previously borne by the full-fledged distributor being assumed by the manufacturer (see discussion of risks in Part I of this chapter). Frequently, the restructuring will be more complicated, with functions performed, assets used and/or risks assumed by either or both parties to a pre-restructuring arrangement shifting to one or more additional members of the group ...

TPG2010 Chapter IX paragraph 9.52

“It may be that comparable uncontrolled transactions for a restructuring transaction between associated enterprises are not found. This does not of itself mean that the restructuring is not arm’s length, but it is still necessary to establish whether it satisfies the arm’s length principle.3 In such cases, determining whether independent parties might be expected to have agreed to the same conditions in comparable circumstances may be usefully informed by a review of:• The restructuring transactions and the functions, assets and risks before and after the restructuring (see Section B.1);• The business reasons for and the expected benefits from the restructuring, including the role of synergies (see Section B.2);• The options realistically available to the parties (see Section B.3).” ...

TPG2010 Chapter IX paragraph 9.51

Where uncontrolled transactions that are potentially comparable to the restructuring transactions are identified, the comparability analysis will also aim at assessing the reliability of the comparison and, where needed and possible, at determining reasonably accurate comparability adjustments to eliminate the material effects of differences that may exist between the situations being compared ...

TPG2010 Chapter IX paragraph 9.50

The determination of whether the conditions made or imposed in a business restructuring transaction are arm’s length will generally be informed by a comparability analysis, and in particular by an examination of the functions performed, assets used and risks assumed by the parties, as well as of the contractual terms, economic circumstances and business strategies ...

TPG2010 Chapter IX paragraph 9.49

Under Article 9 of the OECD Model Tax Convention, where the conditions made or imposed in a transfer of functions, assets and/or risks, and/or in the termination or renegotiation of a contractual relationship between two associated enterprises located in two different countries differ from those that would be made or imposed between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly ...

TPG2010 Chapter IX paragraph 9.48

A business restructuring may involve cross-border transfers of something of value, e.g. of valuable intangibles, although this is not always the case. It may also or alternatively involve the termination or substantial renegotiation of existing arrangements, e.g. manufacturing arrangements, distribution arrangements, licenses, service agreements, etc. The transfer pricing consequences of the transfer of something of value are discussed at Section D of this part and the transfer pricing consequences of the termination or substantial renegotiation of existing arrangements are discussed at Section E ...

TPG2010 Chapter IX paragraph 9.47

“It is a good practice for taxpayers to set up a process to establish, monitor and review their transfer prices, taking into account the size of the transactions, their complexity, the level of risk involved, and whether they are performed in a stable or changing environment (see paragraphs 3.80- 3.83). The process of assessing the consistency with the arm’s length principle of a taxpayer’s risk allocations can be burdensome and costly. It would be reasonable to expect that the extent and depth of the analysis will depend:• On the materiality of the risk and in particular on whether it has a significant profit potential attached to it, and• On whether significant changes in the risk allocation have occurred, e.g. following a significant change of risk profile as a result of a restructuring.” ...

TPG2010 Chapter III paragraph 3.83

Small to medium sized enterprises are entering into the area of transfer pricing and the number of cross-border transactions is ever increasing. Although the arm’s length principle applies equally to small and medium sized enterprises and transactions, pragmatic solutions may be appropriate in order to make it possible to find a reasonable response to each transfer pricing case ...

TPG2010 Chapter III paragraph 3.82

It is a good practice for taxpayers to set up a process to establish, monitor and review their transfer prices, taking into account the size of the transactions, their complexity, level of risk involved, and whether they are performed in a stable or changing environment. Such a practical approach would conform to a pragmatic risk assessment strategy or prudent business management principle. In practice, this means that it may be reasonable for a taxpayer to devote relatively less effort to finding information on comparables supporting less significant or less material controlled transactions. For simple transactions that are carried out in a stable environment and the characteristics of which remain the same or similar, a detailed comparability (including functional) analysis may not be needed every year ...

TPG2010 Chapter III paragraph 3.81

When undertaking a comparability analysis, there is no requirement for an exhaustive search of all possible relevant sources of information. Taxpayers and tax administrations should exercise judgment to determine whether particular comparables are reliable ...

TPG2010 Chapter III paragraph 3.80

One question that arises when putting the need for comparability analyses into perspective is the extent of the burden and costs that should be borne by a taxpayer to identify possible comparables and obtain detailed information thereon. It is recognised that the cost of information can be a real concern, especially for small to medium sized operations, but also for those MNEs that deal with a very large number of controlled transactions in many countries. Paragraphs 4.28, 5.6, 5.7 and 5.28 contain explicit recognition of the need for a reasonable application of the requirement to document comparability ...