PodCast: Q&A dealing with Arms Length Principle in Transfer Pricing

In this PodCast we have a Q&A session on Arms Length Principle with Mr Okkie Kellerman.

Okkie Kellerman is a very well known Transfer Pricing specialist and is a lecturer on I/I/T/F’s Postgraduate Diploma in Transfer Pricing.

The questions have been raised by students on the Postgraduate Diploma in Transfer Pricing and they are very applicable to all Transfer Pricing specialists

QUESTIONS

Question 1 (00:54)

Is it true that the application of ALP is only possible where there are comparables under similar market conditions?

Hence, the Transactional profit split is not really an Arm’s length method but a variant of global formulary allocation.

Question 2 (06:56)

Are there guidelines or examples on the kind of adjustments entities can make to get it comparable?

Question 3 (09:22)

What happens when there are no proper comparables in the industry code where the target fits, for instance all the potential comparables of high investment in intangibles and your target is a distributor?

Question 4 (10:24)

Applying ALP requires comparison of the terms and conditions of the controlled transaction with that of the uncontrolled transaction. This is often not possible with the TNMM because of the lack of detailed information about transactions from commercial databases.

Is it therefore true that because of the low level of detailed data and low level of comparability required for TNMM, this method is not capable of producing a fair Arms Length Price that replicates the dynamics of market conditions?

Question 5 (13:19)

What is the weakest point of Arm’s Length that frequently leads to disputes?

Question 6 (14:40)

It is said that once comparable entities have been identified, one must look at:

  • company activity
  • business description
  • ownership holding patterns
  • year of available financials
  • financials themselves

Is this only done to refine and make adjustments? Or is this a further level of comparability testing?

Question 7 (21:54)

There are a lot of companies from databases that don’t have websites or any other publicly information required to perform a manual or subjective review (for instance companies from some Asian countries).

Is it risky to eliminate those kinds of companies in the analysis so as to improve compatibility, especially where they distort the statistical range?

Question 8 (23:17)

What would be the main changes in TP policies that companies will have to apply due to COVID 19 situation? (example: Do we need to update current benchmarks and include comparables with negative margins even for low risk distributors?

Shall we for example use the range 2008–2010 which would more closely reflect time of crisis?