TPG2017 Chapter II Annex II example 10

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Category: OECD Transfer Pricing Guidelines (2017) | Tag: ,
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46. Company A designs, develops and produces a line of high technology industrial products. A new generation of the product line incorporates a key component developed and created by Company B, an associated enterprise of Company A. This key component is highly innovative, incorporating unique and valuable intangibles. This innovation represents the key point of difference in the new generation of products. The success of the new generation of products is heavily dependent upon the performance of the key component made by Company B. The key component is specifically tailored for the new generation of products and cannot be used in any other products.
47. The key component was developed entirely by Company B. The accurate delineation of the transaction determines that Company B performs all the control functions and assumed all the risks in relation to the development of the component, with no involvement by Company A.
48. The accurate delineation of the transaction also finds that Company A performs all the control functions and assumed all the risks in relation to the overall production and sale of the new generation of products. Company A cannot control (and thus does not assume) the risks relating to the performance of the key component.
49. In this example, it is determined that while Company A and Company B each assumes separate economically significant risks, those risks are highly inter-dependent. As a result, it is determined that the transactional profit split method is the most appropriate method.
50. If it is also found that the most appropriate way of applying the transactional profit split method in this case is by splitting revenues or gross profits from Company A’s sales of the new generation product, each party would bear the consequences of the playing out of risks relating to their own operating costs.

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