The MAP APA may cover all of the transfer pricing issues of a taxpayer (or of the members of a MNE group) or may be more limited, for example to a particular transaction, sets of transactions, product lines or to only some members of a MNE group. Some countries, whilst recognising the need for flexibility in the process, have concerns over the appropriateness of specific issue APAs. It may be difficult to evaluate some issues in isolation, for example where the transactions covered by the proposal are highly interrelated with transactions not covered by the proposal, or where there is a need to analyse transfer pricing issues in a wider context because intentional set offs are involved (see paragraphs 3.13-3.17 of the Guidelines) ...

The question at issue was whether a Crop tax adviser had acted in accordance with the requirements of a reasonably competent and reasonably acting adviser when advising on the so-called royalty routing and its implementation. Judgement of the Court of Appeal “Crop is liable for the damages arising from the shortcoming. For the assessment of that damage, the case must be referred to the Statement of Damages, as the District Court has already decided. To answer the question of whether the likelihood of damage resulting from the shortcomings is plausible, a comparison must be made between the current situation and the situation in which business rates would have been applied. For the hypothetical situation, the rates to be recommended by the expert should be used. For the current situation, the Tax Authorities have agreed to adjusted pricing. The question whether and to what extent [the respondents] et al. can be blamed for insufficiently limiting their loss in the negotiations with the tax authority, as argued by Crop, should be adjudicated in the proceedings for the determination of damages, because it has not been made plausible beforehand that Crop’s obligation to pay compensation should lapse in full because this is required by the requirements of fairness under the given circumstances” Click here for English Translation Click here for other translation ...

A taxpayer may seek on examination a reduction in a transfer pricing adjustment based on an unintentional over-reporting of taxable income. Tax administrations in their discretion may or may not grant this request. Tax administrations may also consider such requests in the context of mutual agreement procedures and corresponding adjustments (see Chapter IV) ...

It may be necessary to evaluate the transactions separately to determine whether they each satisfy the arm’s length principle. If the transactions are to be analysed together, care should be taken in selecting comparable transactions and regard had to the discussion at paragraphs 3.9-3.12. The terms of set-offs relating to international transactions between associated enterprises may not be fully consistent with those relating to purely domestic transactions between independent enterprises because of the differences in tax treatment of the set-off under different national tax systems or differences in the treatment of the payment under a bilateral tax treaty. For example, withholding tax would complicate a set-off of royalties against sales receipts ...

Recognition of intentional set-offs does not change the fundamental requirement that for tax purposes the transfer prices for controlled transactions must be consistent with the arm’s length principle. It would be a good practice for taxpayers to disclose the existence of set-offs intentionally built into two or more transactions between associated enterprises and demonstrate (or acknowledge that they have relevant supporting information and have undertaken sufficient analysis to be able to show) that, after taking account of the set-offs, the conditions governing the transactions are consistent with the arm’s length principle ...

Intentional set-offs may vary in size and complexity. Such set-offs may range from a simple balance of two transactions (such as a favourable selling price for manufactured goods in return for a favourable purchase price for the raw material used in producing the goods) to an arrangement for a general settlement balancing all benefits accruing to both parties over a period. Independent enterprises would be very unlikely to consider the latter type of arrangement unless the benefits could be sufficiently accurately quantified and the contract is created in advance. Otherwise, independent enterprises normally would prefer to allow their receipts and disbursements to flow independently of each other, taking any profit or loss resulting from normal trading ...

An intentional set-off is one that associated enterprises incorporate knowingly into the terms of the controlled transactions. It occurs when one associated enterprise has provided a benefit to another associated enterprise within the group that is balanced to some degree by different benefits received from that enterprise in return. These enterprises may indicate that the benefit each has received should be set off against the benefit each has provided as full or part payment for those benefits so that only the net gain or loss (if any) on the transactions needs to be considered for purposes of assessing tax liabilities. For example, an enterprise may license another enterprise to use a patent in return for the provision of know-how in another connection and indicate that the transactions result in no profit or loss to either party. Such arrangements may sometimes be encountered between independent enterprises and should be assessed in accordance with the arm’s length principle in order to quantify the value of the respective benefits presented as set-offs ...

A taxpayer may seek on examination a reduction in a transfer pricing adjustment based on an unintentional over-reporting of taxable income. Tax administrations in their discretion may or may not grant this request. Tax administrations may also consider such requests in the context of mutual agreement procedures and corresponding adjustments (see Chapter IV) ...

It may be necessary to evaluate the transactions separately to determine whether they each satisfy the arm’s length principle. If the transactions are to be analysed together, care should be taken in selecting comparable transactions and regard had to the discussion in Section iii) of Part C. The terms of set-offs relating to international transactions between associated enterprises may not be fully consistent with those relating to purely domestic transactions between independent enterprises because of the differences in tax treatment of the set-off under different national tax systems or differences in the treatment of the payment under a bilateral tax treaty. For example, withholding tax would complicate a set-off of royalties against sales receipts ...

Recognition of intentional set-offs does not change the fundamental requirement that for tax purposes the transfer prices for controlled transactions must be consistent with the arm’s length principle. It would be helpful for taxpayers to disclose the existence of set-offs intentionally built into two or more transactions between associated enterprises and demonstrate (or acknowledge that they have relevant documentation and have undertaken sufficient analysis to be able to show) that, after taking account of the set-offs, the conditions governing the transactions are consistent with the arm’s length principle at the time of filing the tax return ...

Intentional set-offs may vary in size and complexity. Such set-offs may range from a simple balance of two transactions (such as a favourable selling price for manufactured goods in return for a favourable purchase price for the raw material used in producing the goods) to an arrangement for a general settlement balancing all benefits accruing to both parties over a period. Independent enterprises would be very unlikely to consider the latter type of arrangement unless the benefits could be accurately quantified and the contract created in advance. Otherwise, independent enterprises normally would prefer to allow their receipts and disbursements to flow independently of each other, taking any profit or loss resulting from normal trading ...

An intentional set-off is one that associated enterprises incorporate knowingly into the terms of the controlled transactions. It occurs when one associated enterprise has provided a benefit to another associated enterprise within the group that is balanced to some degree by different benefits received from that enterprise in return. These enterprises may claim that the benefit each has received should be set off against the benefit each has provided as full or part payment for those benefits so that only the net gain or loss (if any) on the transactions needs to be considered for purpose of assessing tax liabilities. For example, an enterprise may license another enterprise to use a patent in return for the provision of know-how in another connection and claim that the transactions result in no profit or loss to either party. Such arrangements may sometimes be encountered between independent enterprises and should be assessed in accordance with the arm’s length principle in order to quantify the value of the respective benefits claimed as set-offs ...

Even if such an arrangement is in principle acceptable, the question which has to be asked in all cases, however, is whether the benefits do in fact balance each other over an appropriate period to the extent claimed. It may well be necessary for the tax authority to analyse the arrangement and the transactions in order to satisfy itself of this and the final judgement will then depend on a reasonably acceptable assessment of what would be an arm’s length price for all the relevant transactions. It should also be remembered that provisions regarding set-off between related parties in international transactions may not be fully comparable with those regarding set-offs between domestic enterprises because of the differences in the tax treatment of the set-off under different national tax systems or differences in the treatment of the payment under double taxation agreements. For example, withholding tax would complicate a set-off of royalties against sales receipts ...

Set-offs may vary in size and complexity from a simple balance of two specific transactions (such as a favourable selling price for manufactured goods in return for a favourable purchase price for the raw material used in producing the goods) to an arrangement for a general settlement balancing all benefits accruing to both parties over a period. Unrelated parties would be very unlikely to consider such set-off arrangements unless the benefits could be accurately quantified in advance, the likelihood of an adequate balance ascertained and the contract made in advance. In any other circumstances, independent parties would normally prefer to allow their receipts and disbursements to flow independently of each other in the ordinary way taking any profit or loss which resulted as part of normal trading, hoping actually to benefit if, for example, market conditions change in their favour ...

Another situation which it may be necessary to consider arises_ when a benefit provided to one enterprise within a group is balanced to some degree by different benefits provided by that enterprise in return, with the consequence that the enterprises claim that the benefit received should be set off against the benefits provided as full or part payment for those benefits so that only the net gain or loss (if any) on the transaction needs to be taken into account in assessing the tax liabilities of the enterprises. An enterprise may, for example, license another enterprise to use a patent in return for the provision of know how in another connection and claim that the transaction results in no profit, no loss. This kind of Arrangement is encountered sometimes between unrelated parties and it could not be argued therefore in principle that it is unacceptable between associated enterprises ...