THE TRANSFER PRICING STUDY STARTING POINT
It all starts with the MNE’s transfer pricing study, hopefully prepared annually, that encapsulates the approach of the MNE and all its subsidiaries or Opcos to comply with the legislation, as guided by the OECD and UN Transfer Pricing Guidelines in justifying its supply of goods, and services to associated entities at an “arm’s length price” or ALP.
Oftentimes the transfer pricing study is a work of cut and paste, where the real value comes into a proper detailed assessment of key variables to arrive at an ALP.
Let us unpack those variables. Remembering the ultimate goal is to determine the ALP at that point in time. In the absence of an ALP definition, we seek guidelines to interpret what ALP price means, but in the context of what?
Firstly, look at what is being charged (or not) for goods and services provided inter-company in an MNE. The enquiry should look specifically at the parties or entities to the tested transaction (the one being looked at to determine the ALP), and the subject-matter of the transaction. If the transaction is a license for the “use of a brand” between the supplier (brand owner) and the buyer (the brand user) pay particular attention to the following, as examples:
- the use of a brand (not the sale of a brand) at a specific time period;
- you are not looking at a supply of a product that includes as its offering the use of the brand, as the use of the brand is not isolated in the supply of that product;
- what is the brand (it is a specific part of the entity’s intellectual property and is usually defined in the license agreement to include images that are trademarked with unique phraseology to describe the brand with particular colors and fonts, collectively representing the aesthetic “look and feel” of the brand);
- what is the transaction that gives rise to the charge for the use of the brand? A transaction offering a product with the brand is not the same as a transaction offering the mere use of the brand;
- Between which entities is the transaction? It is usually a parent company supplying goods or services to an associated entity. It is not an associated entity supplying goods or services to an end consumer of a product that comprises as a part the brand. There are other elements in the latter transaction between parties different to the tested transaction, eliminating the quality of comparison required in determining the ALP.