Page 146 - SAIT Compendium 2016 Volume2

PN 7/1999 Income Tax acT: PracTIce noTes PN 7/1999
7.5 Other than tax considerations, factors such as governmental regulations (for example price or exchange controls) may distort the prices charged between connected persons. These factors are recognised by the OECD Guidelines and the Commissioner. This Practice Note intends to provide broad guidelines about the business and economic concepts which serve to indicate what information, data and other evidence would support a contention that a transaction has occurred at arm’s length.
7.6 The determination of an arm’s length consideration is not an exact science but requires judgment on the part of both the taxpayer and the Commissioner. Accordingly, taxpayers and the Commissioner need to approach each case, having due regard for the unique business and market realities applicable to each individual case.
7.7 An arm’s length price does not necessarily constitute a single price, but a range of prices and the facts of each case will determine where, within that range, a speci c arm’s length price will lie. See also paragraph 11.4 in this regard.
8 Principles of Comparability
8.1 Introduction
8.1.1 Comparability is fundamental to the application of the arm’s length principle. The preferred arm’s length methods are based on the concept of comparing the prices/margins achieved by connected persons in their dealings to those achieved by independent entities for the same or similar dealings. In order for such comparisons to be useful, the economically relevant characteristics of the situations being compared must be highly comparable.
8.1.2 To be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the method (e.g. price or margin), or that reasonably accurate adjustments can be made to eliminate the effect of any such differences. If suitable adjustments cannot be made, then the dealings cannot be considered comparable.
8.1.3 Since precise calculations cannot be made and the application of any method involves elements of judgment, there is, depending on the circumstances of the particular case, a need to avoid making adjustments to account for minor or marginal differences in comparability.
8.1.4 The objective of comparability is to always seek the highest practical degree of comparability, recognising though that there will be unique situations and cases involving unique intangibles where it is not practicable to apply methods based on a high degree of direct comparability.
8.1.5 The practicable standard of comparability will be determined by the amount of data on which comparisons with uncontrolled situations and dealings in a particular case can be based.
Comparisons with controlled dealings by other taxpayers cannot be regarded as arm’s length comparisons.
8.1.6 The assessment of comparability can be affected, inter alia, by: (a) the characteristics of goods and services;
(b) the relative importance of functions performed;
(c) the terms and conditions of relevant agreements;
(d) the relative risk assumed by the taxpayer, connected enterprises and any independent party where such party is considered as a possible comparable;
(e) economic and market conditions; and
(f) business strategies.
8.2 Characteristics of the property or services
8.2.1 Differences in the speci c characteristics of property or services account, at least in part, for differences in their
value in the open market. The OECD Guidelines, at paragraph 1.19, mention a non-exhaustive list of features that may be relevant in comparing two products:
8.2.2 The signi cance of the actual characteristics of a product or services being transferred in determining an arm’s length price depends on the method applied in determining an arm’s length price. For example, in applying the Comparable Uncontrolled Price (CUP) method, the actual characteristics of the goods or services are critical. On the other hand, when the Transactional Net Margin method is applied, the characteristics of the goods or services transferred are not nearly as important as the functions and risks undertaken by the relevant entities. Refer to paragraph 9 for a discussion on the various transfer pricing methods.
8.3 Functions undertaken
8.3.1 The compensation for the transfer of property or services between two independent enterprises will usually re ect the functions that each enterprise performs, taking into account the risks assumed and the assets used. In determining whether two transactions are comparable, the functions and risks undertaken by the independent parties should be compared to those undertaken by the connected persons.
8.3.2 Economic theory predicts that when various functions are performed by a group of independent enterprises, the enterprise that provides most of the effort and, more particularly, the rare or unique functions, and assumes the most risk should earn a greater portion of the pro t. For example, a subsidiary may be responsible for the entire assembly of a product. If the trademark, know-how and the selling effort rest with the parent and the subsidiary
Tangible property:
Intangible property:
Services:
Physical features
Form of the transaction
Nature of services
Quality and reliability
Type of property
Extent of services
Availability
Duration of protection
Volume of supply
Degree of protection
Anticipated bene ts from use
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