Before you can create a TP policy, you need to identify your 'anchor points'.
Too often we see TP reports which have clearly not even attempted to understand the legal structure of the groups they are describing - such as which entities act as resellers or licensors, as opposed to internal service providers.
Here’s why this a problem.
The OECD TP Guidelines make it clear that the economic conditions between related parties must be assessed in the context of the actual legal and regulatory environment within which those parties operate. This environment includes regulatory licences and authorisations as well as legal restrictions on operation.
These legal factors may be seen as ‘anchor points’, which are essentially fixed (unless there is a restructuring of the group in terms of how it operates legally and commercially). Other examples of ‘anchor points’ include:
* legal and beneficial ownership of physical assets
* legal and beneficial ownership of intellectual property
* the group’s contracting model, including which legal entities contract with third party customers, suppliers, lenders and so on.
It’s true that TP analysis may attribute little or no value to certain factors such as bare legal ownership of assets. However, without clarity on the legal anchor points, it’s impossible to accurately describe the actual intercompany transactions concerned. Any description of those transactions would just be a fiction, divorced from commercial reality, and any purported contractual allocation of risks and rewards would be meaningless.
Or course, accurately defining the legal substance of intercompany transactions is not just relevant for transfer pricing compliance. It may also influence the treatment of the arrangements for matters such as customs, VAT/GST, withholding taxes and regulatory purposes.
P.S. Sorry about the gratuitous picture of Yvon Chouinard. I don’t know anything about rock climbing, and please don’t ask me about pitons. The image just seemed to link with the analogy of ‘anchor points’. And I would highly recommend his book ‘Let My People Go Surfing’.
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