Company S1 carries on a manufacturing business that involves holding substantial inventory and a significant investment in plant and machinery. It owns commercial property situated in an area prone to increasingly frequent flooding in recent years. Third-party insurers experience significant uncertainty over the exposure to large claims, with the result that there is no active market for the insurance of properties in the area. Company S2, an associated enterprise, provides insurance to Company S1, and an annual premium representing 80% of the value of the inventory, property and contents is paid by Company S1. In this example S1 has entered into a commercially irrational transaction since there is no market for insurance given the likelihood of significant claims, and either relocation or not insuring may be more attractive realistic alternatives. Since the transaction is commercially irrational, there is not a price that is acceptable to both S1 and S2 from their individual perspectives.
TPG2022 Chapter I paragraph 1.146
Posted on |
By OECD
Category: OECD Transfer Pricing Guidelines (2022), TPG2022 Chapter I: The arm's length principle | Tag: Delineation, Disregarding the transaction, Example - commercially irrational transaction, Flooding insurance, No price acceptable to both parties, Non-recognition and re-characterisation, Recognition of actual transaction, Substance over form
« Prev |
Next » Related Guidelines
- TPG2022 Chapter II Annex I paragraph 1[See Chapter II, Part III, Section B of these Guidelines for general guidance on the application of the transactional net margin method. The assumptions about arm’s length arrangements in the following examples are intended for illustrative purposes only and should not be taken as prescribing adjustments and arm’s length arrangements...
- TPG2022 Chapter X paragraph 10.203Insurance also requires risk diversification. Risk diversification is the pooling of a portfolio of risks by which the insurer achieves an efficient use of capital. Large commercial insurers rely on having sufficiently large numbers of policies with similar probabilities of loss to allow statistical laws of averages to apply and...
- TPG2022 Chapter VI Annex I example 2486. Zhu is a company engaged in software development consulting. In the past Zhu has developed software supporting ATM transactions for client Bank A. In the process of doing so, Zhu created and retained an interest in proprietary copyrighted software code that is potentially suitable for use by other similarly...
- TPG2022 Chapter X paragraph 10.221It is important to recognise that the capital adequacy requirements of a captive insurance are likely to be significantly lower than an insurer writing policies for unrelated parties. This factor should be considered and, if necessary, adjusted for in order to determine the appropriate level of capital to use when...
- TPG2022 Chapter VI Annex I example 926. 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 IX paragraph 9.24Some businesses have indicated that multinational businesses, regardless of their products or sectors, have reorganised their structures to provide more centralised control and management of manufacturing, research and distribution functions. The pressure of competition in a globalised economy, savings from economies of scale, the need for specialisation and the need...
- TPG2022 Chapter VIII Annex example 1a8. The facts are the same as Example 1. In accordance with the guidance in paragraph 8.27, an alternative way to achieve the identical result under Example 1 is through the use of a two-step process as set out below 9. Step 1 (contributions measured at cost): Company A should...
- TPG2022 Chapter II Annex II example 1474. Below are some illustrations of the effect of choosing a measure of profits to determine the relevant profits to be split when applying a transactional profit split Scenario 1 74. Assume A and B are two associated enterprises situated in two different tax jurisdictions. Both manufacture the same widgets...
- TPG2022 Chapter VI Annex I example 1030. 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...
- TPG2022 Chapter VI Annex I example 1864. Primarni is organised in and conducts business in country A. Company S is an associated enterprise of Primarni. Company S is organised in and does business in country B. Primarni develops a patented invention and manufacturing know-how related to Product X. It obtains valid patents in all countries relevant...