RoyaltyStat Blog

Crude Oil and Natural Gas Prices are Random Walks

Posted by Ednaldo Silva

It’s often stated that crude oil and natural gas (hereafter energy) prices are determined by supply and demand conditions. The empirical evidence shows that this notion is false because energy prices follow an autoregressive mechanism. Energy prices approach a random walk in which the autoregression slope coefficient is not different from one.

Asset Intensity Adjustments in Transfer Pricing Lack Merit

Posted by Ednaldo Silva

Asset intensity adjustments to operating profits, which I reviewed performing audit assistance, lack economic or statistical merit and are inconsistent with guidance provided in the transfer pricing regulations.

ITAT Transfer Pricing Decision on Use of the Resale Price Method

Posted by Piyush Gupta

The Income Tax Appellate Tribunal (ITAT) of Bangalore, India issued its decision on 04 January 2022, in the case of Randox Laboratories India Private Limited V. The Assistant Commissioner of income tax (IT(TP)A No 2576/Bang/2019) that the Resale Price Method (RPM) is the most appropriate method (MAM) for benchmarking inter-company transaction pertaining to import and resale (without any value addition) of finished goods.

Transfer Pricing and Financial Transactions in the UN Manual, OECD Guidelines and Brazil

The subject of this article is transfer pricing in Brazil with a focus on financial transactions. The topic of financial operations was recently updated both in the Transfer Pricing Guidelines of the Organization for Cooperation and Development (OECD TPG), in 2020, and in the UN Practical Manual on Transfer Pricing for Developing Countries (UN Manual), in 2021, which was launched last year at the 22nd Session of the United Nations Committee of Experts on Taxation.

Pfizer’s Galactic Operating Profit Markup

Posted by Ednaldo Silva

The company-level operating profit markup can be estimated as a power function or a linear function between Net Sales (SALE) and Total Cost = XOPR = COGS + XSGA. The difference between Net Sales and Total Cost (measured by XOPR) is OIBDP (operating income [profit] before depreciation and amortization, or EBITDA). Some analysts include DP (depreciation and amortization) in total cost; however, DP is subject to substantial accounting discretion (such as including acquisition related impairment charges), which can prejudice cross-section comparisons.

Working Capital Adjustments in Transfer Pricing

Posted by Geoff Morris

As a transfer pricing practitioner with many years' experience across many industries and transactions, I’ve heard many reasons for making working capital adjustments (WCA). I’ve seen it described as ‘standard’ or ‘automatic’, as well as ‘unreliable’ and ‘rarely to be performed’. I’ve also heard some describe it as an adjustment they ‘believe in’, or an economic factor that an arm’s length party would ‘always’ take into account in their pricing. To untangle this knot, I’ve set out below some of the issues that I would consider before undertaking a WCA.

Should Brazil Adopt the OECD Guidance on Intercompany Financing?

Brazil’s approach to intercompany financing may respect the currency of denomination of a multinational’s intercompany loan policies but falls short of other key aspects, such as the term of the intercompany loan. The OECD released its transfer pricing guidance on financial transactions on February 11, 2020. The guidance on the pricing of intercompany loans placed appropriate focus on the contractual terms as well as the credit rating of the borrowing affiliate.

Transfer Pricing Issues in Cloud Computing

Posted by Piyush Gupta

Organizations around the world are gaining valuable insight into not only the potential benefits of the Cloud, but also the practical challenges of adopting these highly disruptive technologies. One of the key considerations when deploying Cloud computing in a multinational enterprise (MNE) is whether or not operating in the Cloud changes the nature of the transaction from a transfer pricing perspective.

Multi-Year Analysis of Profit Indicators

Posted by Ednaldo Silva

The OECD Transfer Pricing Guidelines (2017, ¶ 6.192) makes a perfunctory reference to multi-year data analysis covering intangibles. The guidance about using multi-year analysis of profit indicators is described on ¶ 3.75 to ¶ 3.79 (“examining multiple year data is often useful in a comparability analysis, but it is not a systematic requirement.”). One expects more competence in economics and statistical principles from the OECD Guidelines, instead of the misleading quote. Unsystematic requirement is nonsense.

Return on Operating Assets Using Error Corrected Regression

Posted by Ednaldo Silva

Here, I show that the return on operating assets (ROA) can be specified as the return on investment (ROI).

Economic time series may have one-period autoregressive errors (AR(1)).

Before Newey-West, the Cochrane-Orcutt or the Prais-Winsten AR(1) error correction was pervasive in applied research. Estimating time-dependent economic variables, such as the individual company’s (tested party and comparables) return on operating assets, without the AR(1) error correction will result in inefficient parameter estimates, and the standard errors will be inconsistent. Hence, the unaware reader can begrime the arm’s length range of comparable return on operating assets.