(a) It has to be recognised that a member of an MNE may, like any independent enterprise, sustain genuine losses whether from mismanagement, from unfavourable economic conditions either in its particular market, or more generally, etc. It follows therefore that if losses are made by a member of an MNE it is not necessarily because the transfer prices of the relevant goods are artificially fixed to produce that result.
(b) There are other circumstances too in which tax authorities could find losses acceptable – particularly what may be called ” start-up ” losses or ” market penetration ” losses which would, of their nature, be expected to be sustained only during a short period – see paragraph 43 below.
(c) Where it is claimed that losses have been sustained over a comparatively short period in such circumstances, tax authorities should not therefore have much difficulty in accepting that they are genuine.
(d) Where, however, a multinational enterprise consistently makes losses over a period of several years in a particular country it might seem appropriate to regard the losses as artificial since an independent enterprise which consistently made losses would eventually go out of business. However, it is necessary to bear in mind that an MNE may legitimately hesitate for a long time to wind up the operations of a loss-making member of the group in a particular country if there are strong political or social pressures in that country to persuade them to continue these operations, or even if the capital which the MNE had invested in that enterprise was considerable in amount and there was some prospect of eventually making the enterprise profitable again. It is not to be assumed therefore . that sustained losses are necessarily artificial. But they could certainly be a feature which deserved close examination.
(e) A rather special case of the loss-making enterprise within an MNE would be exemplified by the situation (mentioned in paragraph 41) in which a group of companies produces a range of pro ducts, some of which would be profitable to produce on an arm’s length basis and some not but all of which are needed in order that the group should make a profit overall and a member of the group in one country produces only the loss-making products in the range while the profit-making products are made elsewhere. An independent enterprise could not operate if it could only make losses by selling at an arm’s length price and it would be appropriate in these circumstances to regard the loss-making member of the MNE as producing not for its own benefit but for the benefit of other members of the group and thus as performing a service for which it should be paid an adequate fee.
(f) In all the above cases, satisfactory evidence needs to be received from the enterprise.