In some cases, taxpayers establish transfer pricing documentation to demonstrate that they have made reasonable efforts to comply with the arm’s length principle at the time their intra-group transactions were undertaken, i.e. on an ex ante basis (hereinafter “the arm’s length price-setting” approach), based on information that was reasonably available to them at that point. Such information includes not only information on comparable transactions from previous years, but also information on economic and market changes that may have occurred between those previous years and the year of the controlled transaction. In effect, independent parties in comparable circumstances would not base their pricing decision on historical data alone.
TPG2022 Chapter III paragraph 3.69
Category: B. Timing issues in comparability | Tag: Comparability analysis, Hindsight, Outcome testing, Price setting, Timing issues
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- TPG2022 Chapter III paragraph 3.70In other instances, taxpayers might test the actual outcome of their controlled transactions to demonstrate that the conditions of these transactions were consistent with the arm’s length principle, i.e. on an ex post basis (hereinafter “the arm’s length outcome-testing” approach). Such test typically...
- TPG2022 Chapter III paragraph 3.74Data from years following the year of the transaction may also be relevant to the analysis of transfer prices, but care must be taken to avoid the use of hindsight. For example, data from later years may be useful in comparing product life...
- TPG2022 Chapter III paragraph 3.71Both the arm’s length price-setting and the arm’s length outcome-testing approaches, as well as combinations of these two approaches, are found among OECD member countries. The issue of double taxation may arise where a controlled transaction takes place between two associated enterprises where...
- TPG2022 Chapter III paragraph 3.68In principle, information relating to the conditions of comparable uncontrolled transactions undertaken or carried out during the same period of time as the controlled transaction (“contemporaneous uncontrolled transactions”) is expected to be the most reliable information to use in a comparability analysis, because...
- TPG2022 Chapter III paragraph 3.67There are timing issues in comparability with respect to the time of origin, collection and production of information on comparability factors and comparable uncontrolled transactions that are used in a comparability analysis. See paragraphs 5.27 and 5.36 of Chapter V for indications with...
- TPG2022 Chapter I paragraph 1.78A contractual assumption of risk constitutes an ex ante agreement to bear some or all of the potential costs associated with the ex post materialisation of downside outcomes of risk in return for some or all of the potential benefit associated with the...
Related Case Law
- Germany vs GmbH, February 1993, Bundesfinanzhof, Case No IR 3/92The decision is about a German distribution company of international groups, which is in a continual overall loss position. This case established an important principle that: ‘… an orderly and diligent manager will, for the corporation managed by him, introduce to the market...
- Poland vs C. spółka z o.o. , November 2022, Supreme Administrative Court, Case No II FSK 974/22C. spółka z o.o. is part of a larger group and mainly (95%) sells products (boxes, metal enclosures, etc.) and related services to related parties. According to its transfer pricing documentation the “cost-plus” method had been used to determine the prices of products...