In order to determine whether at arm’s length the restructuring itself would give rise to a form of compensation, it is essential to understand the restructuring, including the changes that have taken place, how they have affected the functional analysis of the parties, what the business reasons for and the anticipated benefits from the restructuring were, and what options would have been realistically available to the parties, as discussed in Section B.
TPG2022 Chapter IX paragraph 9.42
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By OECD
Category: OECD Transfer Pricing Guidelines (2022), Options Realistically Available, TPG2022 Chapter IX: Transfer Pricing Aspects of Business Restructurings | Tag: Anticipated benefits, Business reasons, Business restructuring, Compensation for termination or renegotiation, Expected benefits, Reallocation of profit potential
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- TPG2022 Chapter IX paragraph 9.13The application of the arm’s length principle to a business restructuring must start, as for any controlled transaction, with the identification of the commercial or financial relations between the associated enterprises involved in the business restructuring and the conditions and economically relevant circumstances attaching to those relations so that the...
- TPG2022 Chapter IX paragraph 9.93The transfer pricing analysis of the arm’s length nature of the conditions of the termination or substantial renegotiation of an agreement should take account of both the perspectives of the transferor and of the transferee. Taking account of the transferee’s perspective is important both to value the amount of an...
- TPG2022 Chapter IX paragraph 9.84However, in those cases where such comparables data are not found, the determination of whether the indemnification clause (or absence thereof) is arm’s length should take into account the rights and other assets of the parties at the time of entering into the arrangement and of its termination or renegotiation....
- TPG2022 Chapter IX paragraph 9.79Once the restructuring arrangements have been accurately delineated and the options realistically available to the parties have been assessed, the following aspects should be considered: Whether commercial law supports rights to indemnification for the restructured entity under the facts of the case as accurately delineated (see Section F. 1 below);...
- TPG2022 Chapter IX paragraph 9.78There should be no presumption that all contract terminations or substantial renegotiations should give a right to indemnification at arm’s length, as this will depend on the facts and circumstances of each case. The analysis of whether an indemnification would be warranted at arm’s length should be made on the...
- TPG2022 Chapter IX paragraph 9.47In scenario no. 1, the distributor is surrendering a profit potential with significant uncertainties for a relatively low but stable rate of profitability. Whether an independent party would be willing to do so would depend on its anticipated return under both scenarios, on its level of risk tolerance, on its...
- TPG2022 Chapter IX paragraph 9.44Take the example of a conversion of a full-fledged manufacturer into a contract manufacturer. In such a case, while a cost plus reward might be an arm’s length remuneration for undertaking the post-restructuring contract manufacturing operations, a different question is whether there should be indemnification at arm’s length for the...
- TPG2022 Chapter IX paragraph 9.41In the context of business restructurings, profit potential should not be interpreted as simply the profits/losses that would occur if the pre-restructuring arrangement were to continue indefinitely. On the one hand, if an entity has no discernible rights or other assets at the time of the restructuring, then it has...
- TPG2022 Chapter IX paragraph 9.39An independent enterprise does not necessarily receive compensation when a change in its business arrangements results in a reduction in its profit potential or expected future profits. The arm’s length principle does not require compensation for a mere decrease in the expectation of an entity’s future profits. When applying the...
- TPG2022 Chapter IX paragraph 9.37There can be group-level business reasons for an MNE group to restructure. However, it is worth re-emphasising that the arm’s length principle treats the members of an MNE group as separate entities rather than as inseparable parts of a single unified business (see paragraph 1.6). As a consequence, it is...