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PN 7/1999 Income Tax acT: PracTIce noTes PN 7/1999
so closely linked or continuous that they cannot be evaluated separately. The OECD Guidelines, at paragraph 1.42, cite the following examples:
(a) some long-term contracts for the supply of commodities or services
(b) rights to use intangible property
(c) pricing a range of closely-linked products (for example in a product line) when it is impractical to determine pricing for each individual transaction
(d) thelicensingofmanufacturingknow-howandthesupplyofvitalcomponentstoaconnectedmanufacturer.
11.11.2 In such cases, it may be appropriate to determine the arm’s length price based on some ‘basket of goods’ or
combination of transactions.
11.11.3 However, the converse may also be true. There will be cases where a multinational packages as a single
transaction and establishes a single price for a number of bene ts, such as licences for patents, know-how and trademarks, the provision of technical and administrative services, and the lease of production facilities. This type of arrangement is often referred to as a package deal. In these cases, it may be necessary to consider separately the component transactions of the package deal. This may occur when it is either inappropriate or not feasible to evaluate the package as a whole.
11.11.4 The OECD Guidelines note, at paragraph 1.44, that a key principle to be followed in considering whether the transfer pricing should be determined for a combination of transactions or on a package basis is that the Revenue Authority should treat the transaction between connected parties in the same way that it would treat a similar deal between independent enterprises. Taxpayers should therefore be prepared to show that any package deal or combination of transactions re ects appropriate transfer pricing. Functions actually performed and all aspects of the transaction must, however, be taken into account in substantiating the transfer price.
11.12 Intentional set-offs
11.12.1 Intentional set-offs occur when one connected enterprise provides a bene t to another that is, to some degree, balanced by another bene t received from that enterprise. Such arrangements may sometimes occur between independent enterprises and should be assessed in terms of the arm’s length principle.
11.13 Arrangements common between group-companies
11.13.1 The mere fact that certain arrangements are common between members of a multinational, will not result in the arrangement being regarded as an arm’s length arrangement. The arrangement will have to be tested against similar arrangements entered into by independent companies in similar circumstances.
11.13.2 A particular transaction cannot be regarded as an arm’s length arrangement merely because it is an arrangement that can only be entered into between connected parties. The fact that unrelated parties would not have entered into similar arrangements will often con rm the non-arm’s length nature of the transaction.
11.14 Real bargaining at the time the transaction was entered into
11.14.1 The arm’s length principle is modelled on notions of comparison and predication about what independent parties dealing at arm’s length either did or might reasonably be expected to have done in the taxpayer’s circumstances. It is therefore relevant to consider whether any comparative analysis was done and to what extent the taxpayer relied thereon. This necessarily involves examination of the outcome of the transaction and is not con ned to an examination of the process. One of the many factors to be taken into account to determine whether a transfer price is an arm’s length price is to establish whether the connected persons actually entered into a bargaining process before xing the relevant transfer prices.
11.14.2 Real bargaining between connected parties would be expected to be achieved where the conditions in which the bargaining is undertaken are similar to those that would exist between unrelated parties dealing at arm’s length. Conditions for arm’s length dealings are sometimes ful lled by members of company groups where the members have a considerable amount of autonomy so that they can, and indeed often do, bargain with each other in a manner similar to that of independent entities.
11.14.3 Listed below are a few of the factors which, depending on the particular case, may lend support to arguments that conditions for real bargaining between connected parties were similar to those existing between unrelated parties dealing with each other at arm’s length:
(a) members of multinationals being allowed to acquire goods and services from unconnected persons where
the price is lower;
(b) members of multinationals being allowed to supply goods and services to unconnected persons where the
price is higher;
(c) each entity having its own pro t and cost responsibility and ‘user pays’ principles applying in relation to
goods and services provided between the entities;
(d) manager remuneration is either signi cantly or wholly connected to the economic performance of the
individual entity and there is no scope for rewarding performance detrimental to the individual entity, but
which is of overall advantage to the group; and
(e) the parties prepared documentation during the negotiation phase similar to the documentation independent
parties dealing at arm’s length would have used in comparable circumstances.
11.14.4 Real bargaining between connected parties would not usually be expected to be achieved where:
(a) the same directors, of cers or representatives handled the negotiations on behalf of all the connected persons; or
(b) one party may have directed the negotiations or determined the outcome of the dealings of the connected persons.
11.15 The use of hindsight
11.15.1 The use of hindsight is inconsistent with the arm’s length principle in setting or reviewing a transfer price. At arm’s length, events occurring after a taxpayer has determined its prices would not affect the determination of those prices, unless they could be reasonably predicted at the time those prices were set.
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