Welcome to the September edition of the ONESOURCE Transfer Pricing Newsletter, your monthly source for the latest transfer pricing news. Each edition will feature articles and insight to keep you apprised on current events in the transfer pricing industry, as well as exciting things we are working on at Thomson Reuters ONESOURCE.
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The following discussion covers how various tax authorities view the issue of secret comparables as opposed to selecting comparable companies from available public databases. The discussion notes that the OECD guidelines discourage the use of secret comparables, which should be good news especially for taxpayers who are prepared to provide their own evidence in a TNMM analysis using third party comparables companies whose financials are available in a publicly available database.
The Indian tax authorities have tentatively established safe harbors for captive software contract R&D affiliates but have also sought the advice from a committee of transfer pricing experts. The safe harbor establishes a minimum markup over value-added expenses equal to 20 percent, which is seen by many as incredibly high. The following paper reports on the expert committee’s thoughts on how to establish a reasonable markup for captive software R&D providers using a TNMM approach, which begs the question of how to identify appropriate comparable companies.
Adobe’s Japanese affiliate provided commission services on sales of goods to Japanese customers receiving a commission payment that covered its operating expenses and granting the affiliate operating profits equal to 1% of sales. Adobe defended this intercompany pricing policy with a TNMM analysis, but the Japanese NTA tried to argue for a higher commission rate using the gross margin of a secret comparable that performed more functions than the Japanese affiliate. The following discussion notes why the Japanese court rejected the position of the NTA.
Question: We are a U.S. parent selling finished goods to Australia customers via a limited function Australian distribution affiliate. Our current transfer pricing policy is to grant the Australian affiliate a gross profit margin equal to 10% as our typical operating expense to sales ratio is 8%. IRS Examination has informed us that they believe that the implied 2% operating margin is as high as they would accept given the limited functions of the Australian entity and the fact that its working capital is modest relative to sales. We understand that the Australian tax authorities have identified four publicly traded Australian distributors that they accept as potential comparables for a TNMM analysis. Which companies are these and would their financials support the position we have taken?
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