Comparability Analysis : The Contractual Terms

Par Robert Robillard - 2 juillet 2014

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Paragraph 1.52 of the OECD Transfer Pricing Guidelines explains:

« In arm’s length transactions, the contractual terms of a transaction generally define explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the parties. As such, an analysis of contractual terms should be a part of the functional analysis […]. »

Moreover, the conduct of the parties should conform to the terms of the contract.

In Canada, paragraph 32 of IC 87-2R International Transfer Pricing recognizes this approach.

In the United States, item (d)(3)(ii)(A) of §1.482-1 Allocation of income and deductions among taxpayers suggests:

« (ii) Contractual terms—(A) In general. Determining the degree of comparability between the controlled and uncontrolled transactions requires a comparison of the significant contractual terms that could affect the results of the two transactions. These terms include—

(1) The form of consideration charged or paid;

(2) Sales or purchase volume;

(3) The scope and terms of warranties provided;

(4) Rights to updates, revisions or modifications;

(5) The duration of relevant license, contract or other agreements, and termination or renegotiation rights;

(6) Collateral transactions or ongoing business relationships between the buyer and the seller, including arrangements for the provision of ancillary or subsidiary services; and

(7) Extension of credit and payment terms. Thus, for example, if the time for payment of the amount charged in a controlled transaction differs from the time for payment of the amount charged in an uncontrolled transaction, an adjustment to reflect the difference in payment terms should be made if such difference would have a material effect on price. Such comparability adjustment is required even if no interest would be allocated or imputed under §1.482-2(a) or other applicable provisions of the Internal Revenue Code or regulations. »

In transfer pricing, any controlled transaction between associated enterprises should be conducted according to some sort of business contract. The contractual terms should reflect the actual business dealings between the associated enterprises.

Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
514-742-8086; robert.robillard « at » localhost

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