• Unique and valuable contributions by each of the parties to the transaction;
• Highly integrated business operations and it cannot be reliably evaluated in isolation; and
• Shared assumption of economically significant risks or separate assumption of closely related risks.

1. contribution approach, and;
2. residual approach

• How to determine relevant profits to be split
• Profit splitting factors e.g., capital used, incremental sales, number of employees, employees’ costs.
• Profit splitting factors need to be objective, verifiable and reliable.

• Paragraphs 2.114 to 2.151, Chapter II, Part III, Section C; and
• Annex II to Chapter II.

Impact

Companies should assess whether the PSM is correctly applied (where it is applied) and whether such application can be made for new related party transactions after taking into account the updated Guidelines.

Taxpayers (and vice-versa, tax authorities) can have relief that tax authorities (and vice-versa, taxpayers) would not use the PSM as a fallback in case no comparables data exist.

• Profit split means also losses split

HTVI covers intangibles of which at the time of the transfer between associated parties no reliable data exist to project future benefit. Therefore, it difficult to predict the level of success and expected profit of the intangible at the time of the transfer.

The transfer pricing risks for the taxpayer is for a valuation to be significantly higher or lower when comparing the ex-ante projections vs, the ex-post outcomes. If a disposal is reviewed in the future, tax authorities are entitled to adjust for the difference.

• Taxpayers need to prepare a reliable valuation analysis before the disposal.
• If discrepancies are found by the tax authority between the ex-ante vs ex post valuation, the taxpayer needs to provide explanation on whether the discrepancies are due to unforeseeable outcomes
• The tax authority may not seek ad adjustment if the ex-ante valuation is more than 5 years old.
• As a guide, the guidelines seem to suggest that a maximum of 20% difference between ex ante and ex post valuation should be allowed. Difference beyond 20% should be investigated.

• Accurate delineation of financial transactions (in particular, capital structures of MNEs);
• Treasury functions;
• Intra-group loans;
• Cash pooling;
• Hedging;
• Guarantees; and
• captive insurance.

• application of general transfer pricing principles to financial transactions, including how to conduct the accurate delineation analysis (determining the characterisation of a balance as debt or equity, as well as the corresponding commercial or financial relations) of the capital structure of MNE groups, and economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions.
• guidance is on specific issues to be considered in applying the arm’s length principle to determine an appropriate price for financial transactions within MNE groups. The specific types of transactions covered include treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance.

• Chapter X
• Paragraphs 1.107 to 1.126, Chapter I, Section D

Impact

Given that such activities (intra-group loans / cash pooling / hedging / guarantees and insurance, etc.) within a group of companies are quite common, but often not properly documented and priced, these Guidelines provide a perfect occasion to create a new transfer pricing policy or, where necessary, amend existing policies.

Moreover, the Guidelines provide tax administrations with a new toolset to challenge positions taken in the past if not in line with the Guidelines