When examining the transfer prices adopted within a multinational enterprise, it is always useful to begin by analysing the functions of the various entities which are comprised in the relevant MNE ” Some familiarity with the structure and organisation of the group and some knowledge of which entities undertake the risks and responsibilities for the various activities are essential for tax authorities to help them in assessing when a profit is likely to arise and roughly what sort of profit it is likely to be. It may be important not only to find out which entities perform the different functions of manufacturing, assembling, research and development, servicing, distribution, marketing and selling, transportation, advertising, etc., and which entities own the trademarks and other intangible property, but also to ascertain in what capacity they perform these functions – whether for example with regard to selling activities as principal (accepting all the risks and entitled to all the profits of the activity) or as agent (with limited risks and for a limited return).
Related Guidelines
- TPG2022 Chapter I paragraph 1.67References to control over risk should not necessarily be taken to mean that the risk itself can be influenced or that the uncertainty can be nullified. Some risks cannot be influenced, and are a general condition of commercial activity affecting all businesses undertaking...
- TPG2022 Chapter I paragraph 1.61In this section references are made to terms that require initial explanation and definition. The term “risk management†is used to refer to the function of assessing and responding to risk associated with commercial activity. Risk management comprises three elements: (i) the capability...
- TPG2022 Chapter I paragraph 1.60The steps in the process set out in the rest of this section for analysing risk in a controlled transaction, in order to accurately delineate the actual transaction in respect to that risk, can be summarised as follows: Identify economically significant risks with...
- TPG2022 Chapter I paragraph 1.59This section provides guidance on the nature and sources of risk relevant to a transfer pricing analysis in order to help identify relevant risks with specificity. In addition, this section provides guidance on risk assumption under the arm’s length principle. The detailed guidance...
- TPG2022 Chapter I paragraph 1.58The assumption of risks associated with a commercial opportunity affects the profit potential of that opportunity in the open market, and the allocation of risks assumed between the parties to the arrangement affects how profits or losses resulting from the transaction are allocated...
- TPG2022 Chapter I paragraph 1.57Risk is inherent in business activities. Enterprises undertake commercial activities because they seek opportunities to make profits, but those opportunities carry uncertainty that the required resources to pursue the opportunities either will be greater than expected or will not generate the expected returns....
Related Case Law
- Spain vs “X Iberica SA”, October 2019, TEAC, Case No Rec. 6537/2017“X Iberica SA” is a Spanish subsidiary of a multinational group and also a participant in the group’s cash pooling system, both as a borrower and as a provider of funds. When the group is not able to finance itself, the vehicle called...
- Austria vs. “Yogo Food-Distributor”, August 2021, Bundesfinanzgericht, Case No RV/3100163/2018“Yogo Food-Distributor” is a subsidiary in the “Yogo Group” and trades in spices and canned meat and vegetables from the territory of the former Yugoslavia. The main sales markets are Austria and Germany (90%), the remainder being distributed among France, Scandinavia, Great Britain...
- Italy vs Prinoth S.p.A., December 2022, Supreme Administrative Court, Case No 36275/2022Prinoth S.p.A. is an Italian manufacturer of snow groomers and tracked vehicles. For a number of years the parent company had been suffering losses while the distribution subsidiaries in the group had substantial profits. Following an audit the tax authorities concluded that the...
- Sweden vs Pandox AB, February 2022, Administrative Court, Case No 12512-20, 12520–12523- 20 and 13265-20Pandox AB is the parent company of a hotel group active in northern Europe. Pandox AB’s business concept is to acquire hotel property companies with associated external operators running hotel operations. Pandox AB acquires both individual companies and larger portfolios, both in Sweden...
- European Commission vs Amazon and Luxembourg, December 2023, European Court of Justice, Case No C‑457/21 PIn 2017 the European Commission concluded that Luxembourg had granted undue tax benefits to Amazon of around €250 million. According to the Commission, a tax ruling issued by Luxembourg in 2003 – and prolonged in 2011 – lowered the tax paid by Amazon...