The Resource Recharacterisation


QUESTIONS: Issue One: Paragraphs 1.37 to 1.41 of the Organisation for Economic Cooperation and Development's "Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations" (TPG) provide for a tax administration to disregard the structure adopted by a taxpayer in entering into a controlled transaction when either "the economic substance of a transaction differs from its form", or "where the arrangements made...differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and [emphasis added] the actual structure practically impedes the tax administration from determining an appropriate transfer price", and by implication to include in the profits of an enterprise any profits which would have accrued to it but for these conditions "which differ from those which would be made between independent enterprises" [OECD Model Tax Convention, Article 9.1]. Issue Two: TPG Paragraphs 1.25 to 1.27 provide for a tax administration to compare the purported allocation of risk with the economic substance of a transaction in order to determine "the conditions each party would expect in arm's length dealings". In doing so, they are to assume that parties are generally "allocated a greater share of those risks over which they have relatively more control". Issue Three: The OECD's Discussion Draft "Transfer Pricing Aspects of Business Restructuring", September 2008 (The Discussion Draft), states that in respect of post-restructuring arrangements, "The contractual allocation of risk between associated enterprises is...respected only to the extent that it has economic substance" and that "Where no comparables exist to support a contractual allocation of risk between related parties, it becomes necessary to determine whether that allocation of risk is one that might be expected to have been agreed between independent parties in similar circumstances" (ibid. Paragraph 18.1). Issue Four: The Discussion Draft suggests that a tax administration could refuse to recognise related party arrangements which are not "commercially rational" using as a test the assumption that "an independent party would not enter into a restructuring transaction that is expected to be clearly detrimental to it ["rather than for the group as whole"] if it has the option realistically available to it not to do so" (Paragraph 18.4)
Citation source
In: Transfer pricing forum. - Arlington. - Vol. 1 (2010), no. 1 (April) ; 81 p
Geographic coverage
Language note
  • OECD Transfer Pricing Guidelines
  • transfer pricing
  • controlled transaction
  • economic substance
  • intangibles
  • investment
  • arm's length principle

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