Finally, when applying a one-sided method such as the resale price method, the cost plus method, or the TNMM, the accounting treatment of the government assistance in both the tested party and any comparable may need to be specifically identified, especially when the tested party and the comparables apply different accounting standards. For example, the government assistance may be deducted from the costs under the relevant accounting standard, or it may be presented separately. In addition, the accounting treatment of government subsidies under different accounting standards may impact different levels of profitability (e.g. gross profit, operating profit, net profit, etc.) or might even be accounted for in the “other comprehensive income” statement, only being recycled into the “profit or loss statement” of the entity over time. Where accounting treatments of the same type of assistance differ between the tested party and the comparable, a comparability adjustment may be required. In addition, divergences in the accounting treatment of government assistance could point to a difference in the type of government support provided – e.g. the accounting treatment of a conditional loan differs from that of an outright grant. Such a difference could affect comparability and might be more difficult to adjust for than a simple accounting difference ...

Under the guidance of Chapter I of the OECD TPG, the provision of government assistance to an associated party will not change the allocation of risk in a controlled transaction for transfer pricing purposes. For instance, assume Company W is a distributor that purchases goods from a related party manufacturer and sells those goods to third party customers in the jurisdiction where it is resident (Country W). Under the accurate delineation of the transaction, the marketplace risk is assumed by Company W. This implies that, under normal economic circumstances, including economic cycles, Company W bears the consequences of the playing out of the marketplace risk (e.g. a decrease in demand due to new competitors entering the market). Assume further that demand for Company W’s products declines significantly due to the measures adopted by the government in Country W in response to the COVID-19 pandemic. Company W receives government assistance in the form of a cash grant to help the entity to support its fixed and operating costs during the period where the measures remain in place. Under the guidance in paragraphs 1.66 and 1.67 of Chapter I of the OECD TPG, the receipt of government assistance does not alter Company W’s contractual arrangements and does not alter Company W’s capability and actual performance of decision-making functions relating to the marketplace risk. Despite the government intervention, Company W would retain the competence and experience regarding the marketplace risk and would continue to possess an understanding of the impact of its decisions related to that risk on the business. Therefore, under the prevailing facts and circumstances, the government assistance to support Company W in tackling the financial distress derived from the COVID-19 pandemic does not modify the allocation of the marketplace risk to Company W. The same conclusion would apply to other risks that had been equally allocated to the distributor, e.g. inventory risk or credit risk ...

In the absence of reliable comparables or other reliable information (such as a robust analysis of the economically relevant characteristics described in paragraph 74) regarding how independent parties would allocate government assistance, caution should be exercised in assessing whether a purported sharing of government assistance represents an arm’s length outcome ...

Under the guidance in Chapter II of the OECD TPG, when establishing arm’s length prices using one-sided methods, particular care must be taken to avoid adopting without further analysis a particular mechanical approach (such as offsetting cost savings achieved through government assistance against the relevant cost base for the transaction; recognising government assistance as revenue; or recognising government assistance as extraordinary income) since this could lead to non-arm’s length prices in transactions among associated parties ...