By looking at and analyzing the basic starting point of the transfer pricing study, and what it is addressing, in very specific terms, the alignment with the most appropriate OECD and UN TPGs that should apply, become obvious. These guidelines produce specific axioms defined as: “a statement or proposition which is regarded as being established, accepted, or self-evidently true.” The clear intention is that the TPG axioms exist through decades of building consensus attained by participating revenue authorities from around the globe to establish specific rules to be followed (as soft law) so as to standardize the process of establishing an ALP. If a revenue authority and taxpayer enter their relationship based on the OECD and UN TPGs, these established axioms in the guidelines are rules to be followed. If not, an extensive motivation by the entity breaching the rules must be provided. This only happens where there are extreme limitations in the availability of comparability factors in the process of establishing an ALP.
For instance, in the field of intellectual property, and specifically brands, determine what is the brand. Not just the ‘look and feel’, but contractually and economically what does it represent? That will determine the approach to what you will compare the transaction to in order to ultimately determine the ALP.
By returning to the key starting point of a transfer pricing study and what it is supposed to represent, you become aware of the fundamentals. The fundamental facts, process and principles.
For instance, when determining the ALP for the use of a brand, it is a specific transaction, between specific parties, for something very specific. Identify these fundamental elements as it becomes clear what must ultimately be defended and proved in court:
- The brand – what is this? A name (trademark) a ‘look and feel’ (the aesthetic appearance);
- The transaction – what is this? An agreement to use the brand (not a sale);
- The parties – who are the parties? A supplier of the use of the brand to a buyer of the use of the brand, both are operating businesses, looking to exploit the best profits out of their bargain, on an ongoing basis (not a sale requiring the valuation of what that sale price should be).
These basic steps are then expanded upon to determine what the OECD and UN Transfer Pricing Guidelines require you to do. But with the basic fundamentals understood, an attempt by the revenue authority to manipulate the determination of an ALP to justify their end – an additional assessment of tax – can be thwarted.