3. Economic analysis:
One of the key principles when performing an economic analysis to determine the arm’s length range of returns to substantiate a taxpayer’s position is that significant events are factored in and such analysis be revisited. The traditional practice of updating or a roll-forward of comparable company benchmarks/prices using the comparable uncontrolled price (CUP) method, are unlikely to reflect the most up to date economic realities faced by the multinational group. As such, taxpayers may have to consider the following options:
- Reallocation of the FAR and use of the Profit Split Method (PSM) – taxpayers may potentially consider adoption of the profit split approach and allocate profits/losses, if suitable. Although when adopting the PSM, it is crucial that several (stringent) conditions are met and there is a clear identification of value generated by each entity involved, resulting in the allocation of profits/losses. A simplistic approach to adopting the PSM is not only likely to attract scrutiny, it will be challenging to document the rationale and support the arm’s length nature of such an allocation.
- Consistent loss-making comparable benchmarks – when performing a benchmarking study to identify a comparable set, the approach of outright rejecting consistent loss-making companies may have to be revisited.
- Use of the CUP and price comparisons – where a taxpayer relies on price benchmarks using the CUP method, it will be important that the 5 factors of comparability be evaluated in the context of any changes and determine if the price comparison continues to remain appropriate.