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In practice, what to do about inventory at the time of the restructuring would likely be taken into account by unrelated parties in agreeing the terms of the total deal, and inventory should be analysed as part of delineating the actual transactions comprising the business restructuring. A key consideration is how to deal with the risks inherent in the inventory, and how to avoid double counting—i.e. the party reducing its risks should not receive a price that takes into account risks it has given up, and cannot exploit. If raw materials costing 100 now have a market price of 80 or 120, then a transfer would crystallise a loss or gain which could be a significant impediment to one of the parties to the restructuring. The matter is likely to be resolved as part of the overall terms of the restructuring and should be analysed accordingly. In practice there may be a transition period where inventory is run down before starting the new arrangements, and thus avoiding transfer of inventory, particularly when there may be several complications beyond transfer pricing involved in transferring legal ownership of inventory cross-border ...

Assume that in order to migrate from the pre-existing arrangement to the restructured one, the raw materials and finished products that are on the balance sheet of the taxpayer at the time the new arrangement is put in place are transferred to the foreign associated enterprise. The question arises how to determine the arm’s length transfer price for the inventories upon the conversion. This is an issue that can typically be encountered where there is a transition from one business model to another. The arm’s length principle applies to transfers of inventory among associated enterprises situated in different tax jurisdictions. The choice of the appropriate transfer pricing method depends upon the comparability (including functional) analysis of the parties. The functional analysis may have to cover a transition period over which the transfer is being implemented. For instance, in the above example: One possibility could be to determine the arm’s length price for the raw material and finished products by reference to comparable uncontrolled prices, to the extent the comparability factors can be met by such comparable uncontrolled prices, i.e. that the conditions of the uncontrolled transaction are comparable to the conditions of the transfer that takes place in the context of the restructuring. Another possibility could be to determine the transfer price for the finished products as the resale price to customers minus an arm’s length remuneration for the marketing and distribution functions that still remain to be performed. A further possibility would be to start from the manufacturing costs and add an arm’s length mark-up to remunerate the manufacturer for the functions it performed, assets it used and risks it assumed with respect to these inventories. There are however cases where the market value of the inventories is too low for a profit element to be added on costs at arm’s length ...

In practice, what to do about inventory at the time of the restructuring would likely be taken into account by unrelated parties in agreeing the terms of the total deal, and inventory should be analysed as part of delineating the actual transactions comprising the business restructuring. A key consideration is how to deal with the risks inherent in the inventory, and how to avoid double counting—i.e. the party reducing its risks should not receive a price that takes into account risks it has given up, and cannot exploit. If raw materials costing 100 now have a market price of 80 or 120, then a transfer would crystallise a loss or gain which could be a significant impediment to one of the parties to the restructuring. The matter is likely to be resolved as part of the overall terms of the restructuring and should be analysed accordingly. In practice there may be a transition period where inventory is run down before starting the new arrangements, and thus avoiding transfer of inventory, particularly when there may be several complications beyond transfer pricing involved in transferring legal ownership of inventory cross-border ...

Assume that in order to migrate from the pre-existing arrangement to the restructured one, the raw materials and finished products that are on the balance sheet of the taxpayer at the time the new arrangement is put in place are transferred to the foreign associated enterprise. The question arises how to determine the arm’s length transfer price for the inventories upon the conversion. This is an issue that can typically be encountered where there is a transition from one business model to another. The arm’s length principle applies to transfers of inventory among associated enterprises situated in different tax jurisdictions. The choice of the appropriate transfer pricing method depends upon the comparability (including functional) analysis of the parties. The functional analysis may have to cover a transition period over which the transfer is being implemented. For instance, in the above example: One possibility could be to determine the arm’s length price for the raw material and finished products by reference to comparable uncontrolled prices, to the extent the comparability factors can be met by such comparable uncontrolled prices, i.e. that the conditions of the uncontrolled transaction are comparable to the conditions of the transfer that takes place in the context of the restructuring. Another possibility could be to determine the transfer price for the finished products as the resale price to customers minus an arm’s length remuneration for the marketing and distribution functions that still remain to be performed. A further possibility would be to start from the manufacturing costs and add an arm’s length mark-up to remunerate the manufacturer for the functions it performed, assets it used and risks it assumed with respect to these inventories. There are however cases where the market value of the inventories is too low for a profit element to be added on costs at arm’s length ...

The Court of First Instance found no merit in the argument that the tax authority should have compared the price at issue with the prices obtained in the liquidation procedure, since the “Inventory-Corp” was not in the liquidation procedure. The three bidders relied on by “Inventory-Corp” do not provide a sufficiently reliable basis for the decision in view of the fact that the applicant did not sell any of its stock to any of them without explanation and the fact that it sold part of its stock to another, unrelated party at cost. In finding the value of the stock to be the amount of the transfer prices, the tax authority in fact decided in favour of “Inventory-Corp”, since the said value of the stock did not contain any mark-up. Judgment of the Court The Supreme court explained that, although Slovenian legislation in force at the time did not specifically provided for the methods of determining transfer market comparable prices, the OECD Guidelines can be used as an interpretative aid or indicative aid in assessing transfer pricing within the meaning of Article 10 of the ITA in the present case. Excerpt “16. However, in the Supreme Court’s view, the transfer prices in the present case were determined in accordance with the regulations in force at the time of the decision, as well as in the light of the OECD Guidelines and the subsequent statutory and regulatory framework for transfer pricing in the Republic of Slovenia. Article 10 of the ITA already provided for the use of the comparative price method (average prices on the domestic or comparable market) for the determination of transfer prices, and the OECD Guidelines also laid down the so-called independent market principle, which is otherwise enshrined as the basic principle for transfer pricing in Article 9 of the OECD Model Agreement. This principle is based on comparing the terms and conditions of directed transactions with those of non- directed transactions, or on determining whether the reported values of related transactions are consistent with comparable market prices that would be obtained between unrelated parties in the same or comparable circumstances. The application of the arm’s length principle involves assessing whether the transfer price accepted by the related undertakings is consistent with the price accepted by unrelated parties in a comparable arm’s length transaction. 17. In determining the transfer prices of inventories at cost, the Primary Authority has satisfied the standard of average prices in the domestic or comparable market, or has reasonably determined those transfer prices on the basis of the so-called free internal price comparability method, i.e. comparing the prices achieved by the auditor with a related party with the prices achieved by the auditor with unrelated parties. In fact, the tax authority found that, in the present case, the only prices realised with unrelated parties were the prices on the basis of which the auditor purchased the material from suppliers on the domestic and foreign markets (purchase prices) and the same (selling) price agreed by the auditor with the unrelated party, B. d.o.o., for a part of this material, to which the auditor, on the same day as to the related party A. Ltd, sold part of the same stock of material that was also the subject of the sale with the related party, at cost, but not at 15% of cost as he had sold it to the related party. In doing so, he also reasonably checked the price obtained against the so-called special conditions of the business (within the meaning of Article 9 of the OECD Model Agreement) alleged by the auditor (that the business was being wound up and, in the case of the sale to B.o.o., a prior order), but found that these alleged special conditions were not present or had not been demonstrated by the auditor in the present case. 18. In the Court’s view, therefore, for the reasons correctly stated by both tax authorities and the Court of First Instance in the contested judgment, in the light of the totality of the circumstances of the present case, the correct decision was not to recognise the purchase prices less the 85% rebate to the auditor for the material sold, but to determine them at the cost of purchase in accordance with the definition of transfer prices as tax-recognised prices set out in Article 10(3) of the ITA.” Click here for English translation Click here for other translation ...