TPG2022 Chapter IX paragraph 9.108

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The selection and application of a transfer pricing method to post-restructuring controlled transactions must derive from the analysis of the economically relevant characteristics of the controlled transaction as accurately delineated. It is essential to understand what the functions, assets and risks involved in the post-restructuring transactions are, and what party performs, uses or assumes them. This requires information to be available on the functions, assets and risks of both parties to a transaction, e.g. the restructured entity and the foreign associated enterprise with which it transacts. The analysis should go beyond the label assigned to the restructured entity, as an entity that is labelled as a “commissionnaire” or “limited risk distributor” can sometimes be found to own valuable local intangibles and to continue to assume significant market risks, and an entity that is labelled as a “contract manufacturer” can sometimes be found to pursue significant development activities or to own and use unique intangibles. In post-restructuring situations, particular attention should be paid to the identification of the valuable intangibles and the economically significant risks that effectively remain with the restructured entity (including, where applicable, local non-protected intangibles), and to whether such an allocation of intangibles and risks satisfies the arm’s length principle. The form of remuneration cannot dictate inappropriate risk allocations. It is the determination of how the parties actually control risks, and whether they have the financial capacity to assume the risks, as set out in the process of analysing risk in Chapter I, which will determine the assumption of risks by the parties, and consequently dictate the selection of the most appropriate transfer pricing method. Issues regarding risks and intangibles are discussed in Part I of this chapter.

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