In the circumstances of Example 2 in paragraph 1.84, the significant risks associated with generating a return from the manufacturing activities are controlled by Company A, and the upside and downside consequences of those risks should therefore be allocated to Company A. Company B controls the risk that it fails to competently deliver services, and its remuneration should take into account that risk, as well as its funding costs for the acquisition of the manufacturing plant. Since the risks in relation to the capacity utilisation of the asset are controlled by Company A, Company A should be allocated the risk of under-utilisation. This means that the financial consequences related to the materialisation of that risk including failure to cover fixed costs, write-downs, or closure costs should be allocated to Company A.
TPG2022 Chapter I paragraph 1.102
Category: D. Guidance for applying the arm’s length principle | Tag: Analysis of risk, Assumption of risk / Risk assumption, Comparability analysis, Contract manufacturing, Cost of closing, FAR analysis, Functional analysis, Funding, Funding without risk, Pricing the transaction, Risk analysis - 6 step
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Next » Related Guidelines
- TPG2022 Chapter I paragraph 1.104Guidance on the relationship between risk assumption in relation to the provision of funding and the operational activities for which the funds are used is given in paragraphs 6.60-6.64. The concepts reflected in these paragraphs are equally applicable to investments in assets other...
- TPG2022 Chapter I paragraph 1.105A party should always be appropriately compensated for its control functions in relation to risk. Usually, the compensation will derive from the consequences of being allocated risk, and therefore that party will be entitled to receive the upside benefits and to incur the...
- TPG2022 Chapter I paragraph 1.103The consequences of risk allocation in Example 3 in paragraph 1.85 depend on analysis of functions under step 3. Company A does not have control over the economically significant risks associated with the investment in and exploitation of the asset, and those risks...
- TPG2022 Chapter I paragraph 1.101In the circumstances of Example 1 in paragraph 1.83, Company A assumes and controls the development risk and should bear the financial consequences of failure and enjoy the financial consequences of success. Company B should be appropriately rewarded for the carrying out of...
- TPG2022 Chapter I paragraph 1.84 (Example 2)Company B manufactures products for Company A. Under step 1 capacity utilisation risk and supply chain risk have been identified as economically significant in this transaction, and under step 2 it has been established that under the contract Company A assumes these risks....
- TPG2022 Chapter I paragraph 1.64Financial capacity to assume risk can be defined as access to funding to take on the risk or to lay off the risk, to pay for the risk mitigation functions and to bear the consequences of the risk if the risk materialises. Access...
Related Case Law
- Poland vs “Fish Factory” sp. z o.o., July 2020, Administrative Court, I SA/Gd 184/20 – WyrokThe activity of Spółka A sp. z o.o. included salmon breeding, processing, smoking and sale and distribution of the finished products. The company operated within Group A with head quarter in the Netherlands. By decision of 27 May 2019, the tax authorities determined...
- Latvia vs SIA „RPM”, May 2013, Administrative District Court, A420496211 (A-00305-13/7)The tax authority (SRS) had disregarded the TP method chosen by the taxpayer and performed its own TP analysis which showed that the income had been below the 1. quartile, and on that basis an assessment of additional taxable income was issued. Judgment...
- Panama vs Puma Energy Bahamas SA, June 2024, Supreme Court, N° 849112020Puma Energy Bahamas SA is engaged in the wholesale of petroleum products, accessories and rolling stock in general in Panama. Following a thorough audit carried out by the Tax Administration in Panama, where discrepancies and inconsistencies had been identified between the transfer pricing...
- Poland vs “Fish Factory” sp. z o.o., April 2023, Supreme Administrative Court, II FSK 2636/20The activity of Spółka A sp. z o.o. included salmon breeding, processing, smoking and sale and distribution of the finished products. The company operated within Group A with head quarter in the Netherlands. By decision of 27 May 2019, the tax authorities determined...
- European Commission vs Amazon and Luxembourg, November 2025, COMMISSION DECISION (EU) 2025/2405The European Commission closed its formal State aid investigation into a Luxembourg tax ruling granted to Amazon in 2003, concluding it did not constitute State aid under Article 107(1) TFEU. The ruling had approved a TNMM-based royalty arrangement allocating profits between Luxembourg entities....