The difference between ex ante and ex post returns discussed in particular in Section D of Chapter VI arises in large part from risks associated with the uncertainty of future business outcomes. As discussed in paragraph 1.78 the ex ante contractual assumption of risk should provide clear evidence of a commitment to assume risk prior to the materialisation of risk outcomes. Following the steps in this section, the transfer pricing analysis will determine the accurate delineation of the transaction with respect to risk, including the risk associated with unanticipated returns. A party which, under these steps, does not assume the risk, nor contributes to the control of that risk, will not be entitled to unanticipated profits (or required to bear unanticipated losses) arising from that risk. In the circumstances of Example 3 (see paragraph 1.85), this would mean that neither unanticipated profits nor unanticipated losses will be allocated to Company A. Accordingly, if the asset in Example 3 were unexpectedly destroyed, resulting in an unanticipated loss, that loss would be allocated for transfer pricing purposes to the company or companies that control the investment risk, contribute to the control of that risk and have the financial capacity to assume that risk, and that would be entitled to unanticipated profits or losses with respect to the asset. That company or companies would be required to compensate Company A for the return to which it is entitled as described in paragraph 1.103.
TPG2022 Chapter I paragraph 1.106
Category: D. Guidance for applying the arm’s length principle | Tag: Analysis of risk, Assumption of risk / Risk assumption, Comparability analysis, Example - asset owner without control over risk, Functional analysis, 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 1.103The 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 1.86Carrying out steps 1-3 involves the gathering of information relating to the assumption and management of risks in the controlled transaction. The next step is to interpret the information resulting from steps 1-3 and to determine whether the contractual assumption of risk is...
- TPG2022 Chapter I paragraph 1.93In some cases, the analysis under step 3 may indicate that there is more than one MNE that is capable of exercising control over a risk. However, control requires both capability and functional performance in order to exercise control over a risk. Therefore,...
- TPG2022 Chapter I paragraph 1.79It is economically neutral to take on (or lay off) risk in return for higher (or lower) anticipated nominal income as long as the net present value of both options are equal. Between unrelated parties, for example, the sale of a risky income-producing...
- TPG2022 Chapter I paragraph 1.91If the circumstances of Example 2 remain the same except for the fact that, while the contract specifies that Company A assumes supply chain risks, Company B is not reimbursed by Company A when there was a failure to secure key components on...
- TPG2022 Chapter I paragraph 1.99In exceptional circumstances, it may be the case that no associated enterprise can be identified that both exercises control over the risk and has the financial capacity to assume the risk. As such a situation is not likely to occur in transactions between...
- TPG2022 Chapter I paragraph 1.72Risks can be categorised in various ways, but a relevant framework in a transfer pricing analysis is to consider the sources of uncertainty which give rise to risk. The following non-exclusive list of sources of risk is not intended to suggest a hierarchy...
- September 2017: Handbook on Effective Tax Risk Assessment using CbC ReportsThe Handbook on Effective Tax Risk Assessment explores how information contained in CbC reports can be used for risk assessment and which types of tax risk indicators that may be identified using the information contained in CbC Reports. In chapter 4 some of...
- July 2017: ATO guidance on related party financing arrangementsThe Practical Compliance Guideline (Guideline) from the ATO outlines the compliance approach to the taxation outcomes associated with a ‘financing arrangement’, as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997), or a related transaction or contract, entered into...
Related Case Law
- Italy vs INTERVET PRODUCTIONS SRL, January 2021, Corte di Cassazione, Case No 22539/2021Intervet Productions SRL, a company resident in Italy, manufactures veterinary medicines and supplements. The Italian tax authorities issued a notice of assessment, relating to the 2004 tax year. In that notice, the tax authorities ascertained the inconsistency of the transfer prices concerning the...
- Romania vs “Milk and Dairy” A. SA, September 2020, Supreme Court, Case No 4702/2020In regards of transfer pricing A. SA had two activities – production of dairy products and distribution of milk – that had been subject to an audit by the tax authorities which resulted in an assessment of additional taxable income. The transfer pricing...
- Denmark vs. “H Borrower and Lender A/S”, January 2021, Tax Tribunal, Case no SKM2021.33.LSR“H Borrower and Lender A/S”, a Danish subsidiary in the H Group, had placed deposits at and received loans from a group treasury company, H4, where the interest rate paid on the loans was substantially higher than the interest rate received on the...
- Indonesia vs P.T. Sanken Indonesia Ltd., December 2020, Supreme Court, Case No. 5291/B/PK/Pjk/2020P.T. Sanken Indonesia Ltd. – an Indonesian subsidiary of Sanken Electric Co., Ltd. Japan – paid royalties to its Japanese parent for use of IP. The royalty payment was calculated based on external sales and therefore did not include sales of products to...