TPG2022 Chapter I paragraph 1.65

Category: D. Guidance for applying the arm’s length principle | Tag: , , , , , ,
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Control over risk involves the first two elements of risk management defined in paragraph 1.61; that is (i) the capability to make decisions to take on, lay off, or decline a risk-bearing opportunity, together with the actual performance of that decision-making function and (ii) the capability to make decisions on whether and how to respond to the risks associated with the opportunity, together with the actual performance of that decision-making function. It is not necessary for a party to perform the day-to-day mitigation, as described in (iii) in order to have control of the risks. Such day-to-day mitigation may be outsourced, as the example in paragraph 1.63 illustrates. However, where these day-to-day mitigation activities are outsourced, control of the risk would require capability to determine the objectives of the outsourced activities, to decide to hire the provider of the risk mitigation functions, to assess whether the objectives are being adequately met, and, where necessary, to decide to adapt or terminate the contract with that provider, together with the performance of such assessment and decision-making. In accordance with this definition of control, a party requires both capability and functional performance as described above in order to exercise control over a risk.






Related Guidelines

  1. TPG2022 Chapter I paragraph 1.62Some risk management functions can be undertaken only by the party performing functions and using assets in creating and pursuing commercial opportunities, while other risk management functions can be undertaken by a different party. Risk management should not be thought of as necessarily...
  2. 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...
  3. TPG2022 Chapter VIII paragraph 8.16To the extent that specific contributions made by participants to a CCA are different in nature, e.g. the participants perform very different types of R&D activities or one of the parties contributes property and another contributes R&D activities, the guidance in paragraph 6.64...
  4. TPG2022 Chapter I paragraph 1.70Assume that an investor hires a fund manager to invest funds on its account. Depending on the agreement between the investor and the fund manager, the latter may be given the authority to make portfolio investments on behalf of the investor on a...
  5. TPG2022 Chapter I paragraph 1.63Risk management is not the same as assuming a risk. Risk assumption means taking on the upside and downside consequences of the risk with the result that the party assuming a risk will also bear the financial and other consequences if the risk...
  6. TPG2022 Chapter VI paragraph 6.64When funding is provided to a party for the development of an intangible, the relevant decisions relating to taking on, laying off or declining a risk bearing opportunity and the decisions on whether and how to respond to the risks associated with the...
  7. TPG2022 Chapter I paragraph 1.69The concept of control may be illustrated by the following examples. Company A appoints a specialist manufacturer, Company B to manufacture products on its behalf. The contractual arrangements indicate that Company B undertakes to perform manufacturing services, but that the product specifications and...
  8. 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...
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  2. 2019: ATO draft on compliance approach to the arm’s length debt testThe draft Guideline provides guidance to entities in applying the arm’s length debt test in Division 820 of the Income Tax Assessment Act 19972 and should be read in conjunction with draft Taxation Ruling TR 2019/D2 Income tax: thin capitalisation – the arm’s...

Related Case Law

  1. 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...
  2. Switzerland vs “Trust Administrator A. SA”, September 2019, Federal Supreme Court, Case No 2C_343/2019A Swiss company provided administration and other services to trusts. According to the company a related party in the Seychelles handled the daily business and received remuneration in accordance with an intra-group service agreement. Due to the service fees paid the Swiss company...
  3. 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...
  4. Spain vs “XZ SA”, March 2022, TEAC, Case No Rec. 4377-2018“XZ SA” is a Spanish parent of a tax consolidation group which is part of a multinational group. The Spanish group participates in the group’s cash pooling system, both as a borrower and as a provider of funds. The objective of cash pooling...