When evaluating whether a taxpayer was following a business strategy that temporarily decreased profits in return for higher long-run profits, several factors should be considered. Tax administrations should examine the conduct of the parties to determine if it is consistent with the purported business strategy. For example, if a manufacturer charges its associated distributor a below-market price as part of a market penetration strategy, the cost savings to the distributor may be reflected in the price charged to the distributor’s customers or in greater market penetration expenses incurred by the distributor. A market penetration strategy of an MNE group could be put in place either by the manufacturer or by the distributor acting separately from the manufacturer (and the resulting cost borne by either of them), or by both of them acting in a co-ordinated manner. Furthermore, unusually intensive marketing and advertising efforts would often accompany a market penetration or market share expansion strategy. Another factor to consider is whether the nature of the relationship between the parties to the controlled transaction would be consistent with the taxpayer bearing the costs of the business strategy. For example, in arm’s length transactions a company acting solely as a sales agent with little or no responsibility for long-term market development would generally not bear the costs of a market penetration strategy. Where a company has undertaken market development activities at its own risk and enhances the value of a product through a trademark or trade name or increases goodwill associated with the product, this situation should be reflected in the analysis of functions for the purposes of establishing comparability.
TPG2022 Chapter I paragraph 1.137
Posted on | By OECD
Category: OECD Transfer Pricing Guidelines (2022), TPG2022 Chapter I: The arm's length principle | Tag: Business strategy, Comparability analysis, Conduct of the parties, Functional analysis, Goodwill, Intangibles, Market penetration schemes, Marketing, Trademark (trade name)
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- TPG2022 Chapter I paragraph 1.138 An additional consideration is whether there is a plausible expectation that following the business strategy will produce a return sufficient to justify its costs within a period of time that would be acceptable in an arm’s length arrangement. It is recognised that a business strategy such as market penetration may...
- TPG2022 Chapter VI Annex I example 8 20. Primair, a resident of country X, manufactures watches which are marketed in many countries around the world under the R trademark and trade name. Primair is the registered owner of the R trademark and trade name. The R name is widely known in countries where the watches are sold...
- TPG2022 Chapter VI Annex I example 10 30. The facts in this example are the same as in Example 9, except that the market development functions undertaken by Company S in this Example 10 are far more extensive than those undertaken by Company S in Example 9. 31. Where the marketer/distributor actually bears the costs and assumes...
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- TPG2022 Chapter VI Annex I example 23 83. Birincil acquires 100% of the equity interests in an independent enterprise, Company T for 100. Company T is a company that engages in research and development and has partially developed several promising technologies but has only minimal sales. The purchase price is justified primarily by the value of the...
- TPG2022 Chapter VI Annex I example 9 26. The facts in this example are the same as in Example 8, except as follows: Under the contract between Primair and Company S, Company S is now obligated to develop and execute the marketing plan for country Y without detailed control of specific elements of the plan by Primair....
- TPG2022 Chapter VI Annex I example 20 69. Ilcha is organised in country A. The Ilcha group of companies has for many years manufactured and sold Product Q in countries B and C through a wholly owned subsidiary, Company S1, which is organised in country B. Ilcha owns patents related to the design of Product Q and...
- TPG2022 Chapter VI Annex I example 17 59. Company A is a fully integrated pharmaceutical company engaged in the discovery, development, production and sale of pharmaceutical preparations. Company A conducts its operations in country X. In conducting its research activities, Company A regularly retains independent Contract Research Organisations (CROs) to perform various R&D activities, including designing and...
- TPG2022 Chapter VI Annex I example 27 97. Company A is the Parent of an MNE group with operations in country X. Company A owns patents, trademarks and know-how with regard to several products produced and sold by the MNE group. Company B is a wholly owned subsidiary of Company A. All of Company B’s operations are...
- TPG2022 Chapter I paragraph 1.136 Timing issues can pose particular problems for tax administrations when evaluating whether a taxpayer is following a business strategy that distinguishes it from potential comparables. Some business strategies, such as those involving market penetration or expansion of market share, involve reductions in the taxpayer’s current profits in anticipation of increased...