However, not every application of the TNMM will in principle require contemporaneous information for FY 2020. For example, a long term arrangement covering FY 2019 through FY 2022 may be in place, including an arm’s length price based on comparables contemporaneous with the negotiation of the arrangement, that insulates the tested party from risks that the tested party does not assume like those that play out during the pandemic. See also paragraph 10.
OECD COVID-19 TPG paragraph 17
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By OECD
Category: OECD Transfer Pricing Guidelines (2017) | Tag: Comparability analysis, Contemporaneous information, COVID-19, Timing issues
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- OECD COVID-19 TPG paragraph 14Information relating to the conditions of comparable uncontrolled transactions undertaken during the same period as the controlled transaction (“contemporaneous uncontrolled transactions”) is the most reliable information to use in a comparability analysis. Such information reflects how independent parties behave in an economic environment that is the same as or substantially...
- OECD COVID-19 TPG paragraph 15In some instances, comparability analysis can be performed using contemporaneous (or near contemporaneous) uncontrolled transactions. For example, publicly available commercial databases typically have current or recent information on financial transactions between unrelated parties, which may provide reliable information on which to base comparability analyses under current economic conditions. Similarly, taxpayers...
- OECD COVID-19 TPG paragraph 16In other instances, it may be more challenging to use contemporaneous uncontrolled transactions as part of a comparability analysis, notably in the application of the transactional net margin method (“TNMM”). When applying the TNMM, taxpayers and tax administrations typically rely on historical information from commercial databases in order to set...
- OECD COVID-19 TPG paragraph 11In principle, any form of publicly available information regarding the effect of COVID-19 on the business, industry and controlled transaction may be relevant in ascertaining the arm’s length nature of an enterprise’s transfer pricing policy implemented for FY 2020. The following sources of information may support that determination through the...
- OECD COVID-19 TPG paragraph 21The difficulty posed by the delayed availability of contemporaneous data on comparable companies or transactions may have been exacerbated by the COVID-19 pandemic. Taxpayers and tax administrations should be mindful that determining a reliable arm’s length outcome requires flexibility and the exercise of good judgment.10 Difficult transfer pricing issues that...
- OECD COVID-19 TPG paragraph 27As a pragmatic means of addressing divergent economic conditions in the pre- or post-pandemic period, and when the pandemic was in effect and its effects on economic conditions were material, it may be appropriate to have separate testing periods (and periods considered for price setting) for the duration of the...
- OECD COVID-19 TPG paragraph 9The unprecedented change in the economic environment following the outbreak of COVID-19 creates unique challenges for performing comparability analysis. The pandemic may have a significant impact on the pricing of some transactions between independent enterprises and may reduce the reliance that can be placed on historical data when performing comparability...
- OECD COVID-19 TPG paragraph 10The challenges associated with performing a comparability analysis may vary depending on the impact of the COVID-19 pandemic on the economically relevant characteristics of the accurately delineated transaction. For example, if a controlled transaction is covered by a pre-existing intercompany agreement (for example, if in 2018 it was determined that...
- OECD COVID-19 TPG paragraph 12Another potential approach to utilise in setting transfer prices is to compare budgeted or forecast financial results to those actually achieved, to approximate the specific effects of COVID-19 on revenues, costs and margins. The financial outcomes that taxpayers within a controlled transaction would have achieved ‘but for’ the impact of...
- OECD COVID-19 TPG paragraph 13Such a review may be performed as part of a more general set of approaches utilised to evaluate the context and the factors that may impact the arm’s length nature of prices....
Supplemental Guidance
- OECD COVID-19 TPG paragraph 14Information relating to the conditions of comparable uncontrolled transactions undertaken during the same period as the controlled transaction (“contemporaneous uncontrolled transactions”) is the most reliable information to use in a comparability analysis. Such information reflects how independent parties behave in an economic environment that is the same as or substantially...
- OECD COVID-19 TPG paragraph 15In some instances, comparability analysis can be performed using contemporaneous (or near contemporaneous) uncontrolled transactions. For example, publicly available commercial databases typically have current or recent information on financial transactions between unrelated parties, which may provide reliable information on which to base comparability analyses under current economic conditions. Similarly, taxpayers...