Transfer Pricing Insider
Volume 2, Issue 3
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Transactional Profit Methods Renewed Focus on Comparability Analysis?
Source: Batanyl Katongera, Senior Manager, ONESOURCE Transfer Pricing, Thomson Reuters
Introduction
A review of the draft work of the Working Party No. 6 (“WP6”) of the OECD Committee on Fiscal Affairs into the application of Transactional Profit Methods, reveals that it appears there may soon be an increased focus by OECD member country tax authorities on the comparability analysis (including functional analysis) in transfer pricing documentation. This will have particular relevance to the selection and application of the Transactional Net Margin Method (“TNMM”) for transfer pricing documentation. Published in 1995, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (“the Guidelines”) stipulate that traditional transaction methods are regarded as preferable to other methods. Accordingly, transactional profit methods are described as ‘last resort methods’, the use of which should be limited to those exceptional situations where there is no data available or where the available data is not of sufficient quality to rely solely or at all on the traditional transaction methods.
Background to the WP6 work
Over the years many member countries have made clear that the frequency of use of the transactional profit methods is much greater than one would expect for their 'last resort' status. Consequently, WP6 is carrying out a review on the implementation of the 1995 Guidelines.
WP6 originally invited comments in February 2006, with a subsequent invitation for additional commentary being made on 25 January 2008. The public responses were published on 7th of May 2008.
In the course of their review, WP6 is looking at the following three areas:
- Arguments in favour of maintaining last resort status
- Arguments in favour of changing the last resort status
- Possible options with respect to status of transactional methods
At present, WP6 has formulated the following tentative conclusions:
- The selection of a transfer pricing method always aims at finding the most appropriate method for a particular case
- WP6 effectively proposes to remove exceptionality and put greater emphasis on relative strengths and weaknesses of each method and importance of comparability analysis
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