This is because the relevant economic outcomes are already known, and the concept of ‘risk’ is only meaningful when there is uncertainty about the future. The OECD’s Transfer Pricing Guidelines are very clear that retrospective contractual allocation of risk after the event does not work. Many people believe that intercompany agreements should be reviewed as part of the year-end process, while assembling the formal transfer pricing documentation for the year in question. Purchase price from manufacturer, taking account of the obsolescence riskįrom the OECD Transfer Pricing Guidelines 2017, p 427.Īt what point in the TP lifecycle do intercompany agreements need to be put in place? The distributor does not benefit from a buy back clause The distributor benefits from a buy back clause In the particular example in the OECD’s Guidelines, if the intercompany agreement does not include a buy back clause, the return for the distributor increases by 20%. Inventory risk would usually be borne by the distributor if it holds stock, but the buy-back clause transfers that risk to the supplier. It relates to a ‘buy back’ clause, in which a related party distributor of goods receives a contractual undertaking from the supplier that the supplier will repurchase any unsold stock. What practical impact do intercompany agreements have on arm’s length pricing for transfer pricing purposes?Īt what point in the TP lifecycle do ICAs need to be put in place?Ī single clause in an intercompany agreement can make a significant difference in this area.Ĭonsider this example from the OECD’s Transfer Pricing Guidelines. In this section we’ll look at two important questions for multinational groups: The IRS Guidance on Transfer Pricing Best Practices is also clear, saying: “Risk analysis should be consistent with intercompany agreements,” and “The transfer pricing documentation should address … allocations of risk, how the risk allocations compare to the comparable companies used, and why the resulting pricing is consistent with the agreement.” It is all set out in detail in the OECD’s Transfer Pricing Guidelines. The OECD and the IRS have stated clearly what they expect from transfer pricing agreements and other documentation. Read The revised Transfer Pricing Guidelines.OECD and IRS guidance on intercompany agreements and the legal implementation of transfer pricing treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance).įinally, consistency changes have been made to the rest of the OECD Transfer Pricing Guidelines. The guidance also addresses specific issues related to the pricing of financial transactions (e.g. It also includes a number of examples to illustrate the principles to be applied. The new transfer pricing guidance on financial transactions describes the transfer pricing aspects of financial transactions. The guidance also includes a number of examples to clarify the application of the HTVI approach in different scenarios and addresses the interaction between the HTVI approach and the access to the mutual agreement procedure. This guidance should improve consistency and reduce the risk of economic double taxation by providing the principles that should underlie the application of the HTVI approach. The new guidance for tax administration on the application of the approach to hard-to-value intangibles (HTVI) is aimed at reaching a common understanding and practice among tax administrations on how to apply adjustments resulting from the application of this approach. It also contains more guidance on how to apply the method, as well as numerous examples. The revised guidance on the application of the transactional profit method retains the basic premise that the profit split method should be applied where it is found to be the most appropriate method to the case at hand, but it significantly expands the guidance available to help determine when that may be the case.
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