TPguidelines

It cannot be envisaged that over a long period an independent enterprise can continue to remain in business and make losses and this has to be taken into account in the attitude of the tax authorities towards associated enterprises which make losses over long periods. It may be recognised that in an arm’s length situation start-up losses may occur, or that, due to a weak market, a profitless situation may last for a relatively long period of time in the anticipation of future compensating profits. Nevertheless, if losses are consistently made over a period in an associated enterprise, the tax authorities will have to address themselves to the question whether these losses are not being made with a view to transferring taxable profits to an associate in another country, or in the financial interest of the group as a whole rather than the associated enterprise in question. This will normally require a closer examination of the whole operations of the group. This examination may well show that the decision to keep going a loss making business has been dictated by constraining political or social reasons; when evidence of such reasons is given, a profit adjustment may or may not be justified.