Basic Transactions

Question 1

9 Step Best Practice for conducting a comparability analysis

Answer 1

Step 1: Determination of years to be covered

Step 2: Broad-based analysis of the taxpayer’s circumstances (Functional & Risk analysis)

Step 3: Understanding the controlled transaction(s) under examination, based on a functional analysis to choose most appropriate transfer pricing method to the circumstances of the case,[…] and to identify the significant comparability factors that should be taken into account.

Step 4: Review of existing internal comparables, if any

Step 5: Determination of available sources of information on external comparables where external comparables are needed taking into account their relative reliability

Step 6: Selection of the most appropriate transfer pricing method and, depending on the method, determination of the relevant financial indicator (e.g. determination of the relevant net profit indicator in case of a transactional net margin method)

Step 7: Identification of potential comparables: determining the key characteristics to be met by any uncontrolled transaction in order to be regarded as potentially comparable, based on the relevant factors identified in Step 3 and in accordance with the
comparability factors set forth at Section D.1 of Chapter I.

Step 8: Determination of and making comparability adjustments where appropriate

Step 9: Interpretation and use of data collected, determination of the arm’s length remuneration

Question 2

5 transfer pricing methods

Answer 2

• CUP Comparable uncontrolled pricing internal /CUP external (price as if for customer / unrelated third party
• Resale price method (Resale Margin)
• Cost plus method
• TNMM (Net Margin)
• Profit Split
• -> page 26TP Book

Question 3

CUP dependence vs other methods dependence

Answer 3

• CUP heavily dependent on amount of comparable transactions available for price of specific product or service
• RPM, COM, TNMM, PS primarily dependent on functional profile of transacting parties

Question 4

Conditions for applying the CUP method

Answer 4

CUP = Comparable Uncontrolled transaction

1. None of the differences (if any) between the transactions being compared or between the enterprises undertaking the transaction could materially affect the price on the open market
2. Reasonably accurate adjustments can be made to eliminate the material effects of such differences

Question 5

CUP Method

Answer 5

CUP = Comparable Uncontrolled transaction

• Most direct and reliable way o apply the arm’s length principle
• Set transfer price for uncontrolled transaction on “a quoted price used as a reference by independent parties in the industry” (comparability incl. physical features and quality of product; terms of delivery, volume, timing , currency terms etc)
• Terms must be comparable for transaction - timing, stage within distribution chain, relevant economic conditions, differences in product quality(ex. Brazilian vs. Columbian coffee), business strategy
• Comparability often only given as internal CUP (eg. compare prices of identical product sold by MNE to related & unrelated parties)

Question 6

CUP - Questions to be asked to management to ensure comparability & question necessity for investigating “minor adjustments”

Answer 6

• Transacting business units have (uninhibited) access to the open market?
• External/ internal products or services equivalent?
• All synergies effects(positive/negative) included in the TP?
• Are TP adjusted to reflect short-term price fluctuation on the market?

Question 7

CUP Decision Tree

Answer 7

1. Are we looking at commodity transaction?
   a) Yes –> 1. Identify “quote price”
   2.double check comparability (remember
   “timing issues” are sensitive for
   commodity issues
   3.conduct adjustment payments(if required)
   b) No –> 1. acknowledge that conducting a reliable (tax
   viable” external CUP for non-commodity
   transaction will be difficult
   2. continue on decision tree
2. Internal CUP identified=
   A) Yes –> 1. delineate tested transaction (closely linked
   transaction will be difficult to evaluate with
   CUP)
   2. evaluate a brought range of relevant
   comparability factors
   3. perform adjustment calculations
   4. if step 3 not 100% convinced of reliability
   of adjustment calculation B
   B) No –> 1. summarize reasons to reject CUP for
   documentation purposes and observe 3b
3. Wan we apply CUP as secondary model?
   A) Yes, work with flexible approach Para. 2.17–>
   1. internal Cup, double/triple check
   adjustment calculations on reliability
   2. Re-visit functional & risk analysis - is there a
   tested party where alternative method
   could be applied?
   3. Compare results from CUP to results form
   alternative methods
   3a. result matching OK
   3b. result not matching investigate reason
   why not matching (ex. could be CUP
   method not that good/reliable in the case
   after all)
   B) No–> find a reliable method

Question 8

Advantage on Resale Price Method

Answer 8

Link pricing mechanism to functional and risk analysis which eliminates systematically the TP risk
-Focused on functional comparison > product comparison

Question 9

RPM (resale price method) applied on

Answer 9

• reference to the resale price margin that same reseller earns o items purchased/sold in comparable uncontrolled transaction (“internal comparability”)
• resale price margin earned by independent enterprise in comparable uncontrolled transaction which may serve as guide (“external comparability”)