OECD COVID-19 TPG paragraph 81

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Under the guidance of Chapter I of the OECD TPG, the provision of government assistance to an associated party will not change the allocation of risk in a controlled transaction for transfer pricing purposes. For instance, assume Company W is a distributor that purchases goods from a related party manufacturer and sells those goods to third party customers in the jurisdiction where it is resident (Country W). Under the accurate delineation of the transaction, the marketplace risk is assumed by Company W. This implies that, under normal economic circumstances, including economic cycles, Company W bears the consequences of the playing out of the marketplace risk (e.g. a decrease in demand due to new competitors entering the market). Assume further that demand for Company W’s products declines significantly due to the measures adopted by the government in Country W in response to the COVID-19 pandemic. Company W receives government assistance in the form of a cash grant to help the entity to support its fixed and operating costs during the period where the measures remain in place. Under the guidance in paragraphs 1.66 and 1.67 of Chapter I of the OECD TPG, the receipt of government assistance does not alter Company W’s contractual arrangements and does not alter Company W’s capability and actual performance of decision-making functions relating to the marketplace risk. Despite the government intervention, Company W would retain the competence and experience regarding the marketplace risk and would continue to possess an understanding of the impact of its decisions related to that risk on the business. Therefore, under the prevailing facts and circumstances, the government assistance to support Company W in tackling the financial distress derived from the COVID-19 pandemic does not modify the allocation of the marketplace risk to Company W. The same conclusion would apply to other risks that had been equally allocated to the distributor, e.g. inventory risk or credit risk.

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