TPG2022 Chapter II Annex II example 12

« | »

59. Company A, resident in Country A, Company B, resident in Country B, and Company C, resident in Country C, are members of an MNE group. Companies A and B undertake the design and manufacturing of products and their activities in this regard are highly integrated. Additionally, Company A and Company B are responsible for the marketing and distribution of the products to unrelated customers in Country A and in Country B, respectively. Company C is responsible for the benchmarkable marketing and distribution of products purchased from Company A and Company B to unrelated customers in Country C.
60. Company A and Company B enter into an agreement to buy and sell pieces, moulds and components to manufacture the different models of the products. These transactions may also relate to semi-finished products to effectively meet customers’ demands in a timely fashion. As a result of their broad experience in the sector, Company A and Company B have each developed unique and valuable know-how and other intangibles in their respective design and manufacturing processes. In contrast, the accurate delineation of the transaction shows that Company C does not make any unique and valuable contribution. Instead, Company C performs benchmarkable marketing and distribution functions.
61. Design and manufacturing are identified as the key value drivers for the MNE group and the functional analysis shows the economically significant risks are the strategic and operational risks relating to the design and manufacturing functions. Company A and Company B are engaged in a complex web of intragroup transactions where the performance of each company heavily depends on the capacity of the other to provide the different components and other inputs. The manufacturing and design activities of Company A and Company B are highly interdependent and the entities both perform relevant control functions in relation to the economically significant risks. In accordance with the risk analysis framework described in Section D.1.2.1 of Chapter I of these Guidelines, it is determined that Company A and Company B share the assumption of the risks relating to design and manufacturing. Both Companies A and B make unique and valuable contributions to the manufacturing and design processes.
62. Under these circumstances, the transactional profit split method is likely to be the most appropriate method for determining the compensation for Companies A and B in relation to their intra-group transactions. However, a one-sided transfer pricing method such as a resale price method or a TNMM is likely to be the most appropriate to determine an arm’s length return for Company C.
63. In applying the transactional profit split method, the sales of products in Countries A, B and C should be taken into account in determining the relevant profits to be split. In the case of Country C, this will be calculated by reference to the sales revenue of Company C, less the arm’s length return to Company C (as established above) for its contributions.
64. Under a residual approach to the transactional profit split method, the first step of the process would be to determine an arm’s length return for the less complex, benchmarkable contributions of each of the parties (i.e. Companies A and B). These amounts are then deducted from the pool of relevant profits to identify the residual profits to be split. Under the second step of the residual analysis, the residual profits would then be split between Company A and Company B on the basis of their relative contributions to those residual profits.

Related Guidelines