PodCast: Q&A dealing with Functional Analysis in Transfer Pricing

In this PodCast we have a Q&A session on Functional Analysis 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.


Question 1 (00:51)

Is it required to perform functional analysis of comparable transactions by comparable companies, so as to establish the economic relevant characteristics? This is because it may be argued that the OECD methodology encourages excessive focus on the controlled transaction with just surface knowledge of the uncontrolled transactions. Hence, a lot of economically relevant differences are not adjusted for.

Question 2 (04:21)

In case there is incoherent information in the Local File and Master File, regarding functions or risks born by an entity, the tax authority may challenge any of the information?

Are they more likely to rely on Master File for being a group document?

Question 3 (07:41)

If a function is not performed frequently, for example an exceptional transaction like the sale of an asset, is that not benchmarked?

Or do you take into account the size and value of the transaction in deciding whether to benchmark or not?

Question 4 (10:09)

How would you prove that the asset is not valuable without performing a valuation?

Question 5 (11:14)

Is there a simple, formal distinction between a supply chain and a value chain?

Question 6 (13:02)

What kind of valuable information to authorities want to get by looking at value drivers?

Question 7 (14:57)

Is there a simple summary of the requirements for the assumption of risk?

Question 8 (18:30)

(1) the party must have control over the risk, which means the ability to decide:

i. whether or not to take on/lay off the risk; and
ii. how to manage that risk; and

(2) the party must have the financial capacity
to carry/bear that risk if it realises.

Is it accurate to say the 2 requirements for the assumption of risk are (1) control and (2) financial capacity as described above?

Question 9 (22:37)

Where parties rendered inter-company services (e.g. advisory services from co A to co B), and the parties failed to recognise those services and take that into account in their pricing, the revenue authority can price it after the fact and make an adjustment.

Why is that not appropriate with risk?

Even if an MNE group fails to have any group member assume a risk formally, if that risk materialises someone is most likely going to suffer, and that is the party that bears the risk, whether it is formally recorded or not.

Why can the revenue authority not make an adjustment in those circumstances?

Question 10 (23:38)

What are going to be main changes that companies will need to implement in order to be in line with the latest OECD guidelines on financial transactions?

Example: IHB’s are usually capitalising interest. Will payment be obligatory in the future?

Question 11 (28:00)

I would like some expansion on the allocation or determination of the profits that will get allocated to the entity that Revenue Authority thinks bears the most risk.

  1. Who then determines the most appropriate method to calculate the profits to be allocated (Revenue Authority or taxpayer)?
  2. Taxpayers allowed to not be interviewed during audits, in case they contradict legal agreements or TP policies?