Transfer Pricing Methods: OverviewBy Robert Robillard - 28 May 2014
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Paragraph 2.2 of the OECD Transfer Pricing Guidelines suggests:
“The selection of a transfer pricing method always aims at finding the most appropriate method for a particular case. For this purpose, the selection process should take account of the respective strengths and weaknesses of the OECD recognised methods; the appropriateness of the method considered in view of the nature of the controlled transaction, determined in particular through a functional analysis; the availability of reliable information (in particular on uncontrolled comparables) needed to apply the selected method and/or other methods; and the degree of comparability between controlled and uncontrolled transactions, including the reliability of comparability adjustments that may be needed to eliminate material differences between them. No one method is suitable in every possible situation, nor is it necessary to prove that a particular method is not suitable under the circumstances.”
Paragraph 33 of IC 87-2R International Transfer Pricing indicates:
“Taxpayers must exercise judgement in determining the degree of comparability of transactions. Selecting the most appropriate pricing method depends largely on the assessment of the comparability of transactions. The availability of quality information on the factors present in the controlled transactions will influence this determination.”
TPM-14 2010 Update of the OECD Transfer Pricing Guidelines further elaborates:
“The 2010 version of the Guidelines essentially suggests that there is no strict hierarchy to be applied to the selection of a transfer pricing method. Rather the focus should be on the quality of the data that is available and, consequently, what will be the most appropriate method. At the same time, the Guidelines continue to suggest that there exists a natural hierarchy to the methods, as referred to in paragraph 2.3. The CRA agrees that the focus of determining the method to use should be the method that will provide the most direct view of arm’s length behaviour and pricing. IC87-2R states that a natural hierarchy exists in the methods. Both IC87-2R and paragraph 2.3 of the 2010 version of the Guidelines state that the traditional transaction methods (e.g. CUP) are preferred over a transactional profit method. For the CRA, these changes do not firmly de-emphasize the natural hierarchy but they refocus the topic on what is truly relevant—the degree of comparability available under each of the methods and the availability and reliability of the data.”
In the United States, item (c)(2) of section 482, §1.482-1 Allocation of income and deductions among taxpayers, suggests:
“(2) Determining the best method. Data based on the results of transactions between unrelated parties provides the most objective basis for determining whether the results of a controlled transaction are arm’s length. Thus, in determining which of two or more available methods (or applications of a single method) provides the most reliable measure of an arm’s length result, the two primary factors to take into account are the degree of comparability between the controlled transaction (or taxpayer) and any uncontrolled comparables, and the quality of the data and assumptions used in the analysis. In addition, in certain circumstances, it also may be relevant to consider whether the results of an analysis are consistent with the results of an analysis under another method.”
In all cases, the transfer pricing method selected should reflect the comparability analysis and take into account every relevant factor as they each apply to the controlled transaction.
Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
514-742-8086; robert.robillard “at” rbrt.ca
RBRT Inc. is all about transfer pricing. We specialize in transfer pricing. Our services include transfer pricing documentation, transfer pricing dispute resolution, advanced pricing agreement (APA), value chain management and TP planning, transfer pricing training. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. RBRT Inc. and the author are not responsible or liable for any error, omission or inaccuracy in such information. Readers should seek independent tax advice and tax counsel from RBRT Inc. as required.
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