RoyaltyStat Blog

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, instead of the misleading quote.

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.

Practical Guide to Location Savings Analysis in Transfer Pricing

Posted by Geoff Morris

Some jurisdictions, like the Chinese State Administration of Taxes (CSAT), include location savings as a key topic in a transfer pricing analysis. CSAT is particularly clear on its expectations on this front. It will only consider an APA when the enterprise has provided a thorough value chain/supply chain analysis that takes into account China’s location-specific advantages such as cost savings and market premiums in choosing and applying an appropriate transfer pricing methodology.

Return on Assets (ROA) is Unreliable in Transfer Pricing

Posted by Ednaldo Silva

The return on assets (ROA) is misused to determine the tested party’s operating profits in transfer pricing. ROA is unreliable because multiple (ill-defined) denominators are employed. Only the composite asset property, plant & equipment (PPENT) is consistent with well-received economic theory. If book (accounting) PPENT is the denominator (explanatory variable), ROA is still unreliable because of varied accumulated depreciation. 

Transfer Pricing and the Burden of Proof in Australia

Posted by Geoff Morris

The Federal Court of Australia (FCA) recently decided against the ATO in the case of Commissioner of Taxation v Glencore Investment Pty Ltd (2020). On one issue however - shipping - the Australian Taxation Office (ATO) recorded a win. The FCA agreed with the ATO that the taxpayer had failed to discharge its onus of proof on this issue. So, what is the burden of proof in an Australian transfer pricing case?

The Cumulative Advertising Effects on Sales

Posted by Ednaldo Silva

I wanna rock your soul. Van Morrison (1970), “Into the Mystic”

A legal strategy in transfer pricing is to dismember the controlled distributors or retailers of integral management or purchase functions to report reduced profit margins.

This legal fiction (no comparable third-party) is made more incongruous by booking a large fraction of the corporate group’s advertising expenses as the tax deductions of the stripped distributors or retailers.

Also, operating loss enterprises are selected as supposed comparables to the forced-invalid distributors.

Triple crown winners are rare.

Here, I test the effect of advertising on enterprise-level sales (revenue) and show that marketing intangible producing activities such as advertising expenses cannot coexist with the legal concept of limited function distributor or retailer.

Hereafter, my exegesis is focused on a group of large US retailers.

The CPM/TNMM is a Multiplier Theory

Posted by Ednaldo Silva

To grasp the legalese of my initial encounters with the 1968 US transfer pricing regulations (under section 482 published in the Federal Register (33 FR 5848), April 16, 1968), I translated the three specified transfer pricing methods (CUP, resale price and cost plus) into algebra and found a multiplier formula tying them together.

I created a two equation system including an accounting equation and a stochastic equation, and obtained the reduced-form equation to estimate the price (CUP) or the selected gross profit indicator. Using the same multiplier procedure, I developed the CPM/TNMM in 1989.

The Berry Ratio is Illegitimate Under the TNMM

Posted by Ednaldo Silva

Le secret d’ennuyer est celui de tout dire. Voltaire (1694-1778)

The Berry ratio is vulnerable to the flexible accounting allocation of costs and expenses among the tested party and its comparables.

A Proposed Transfer Pricing Safe Harbor for US Retailers

Posted by Ednaldo Silva

You better stop the things you do. Jay Hawkins (1929-2000), “I Put a Spell on You.”

US-listed retailers data show that a simple formula can be used to provide reliable estimates of a controlled retailer’s operating profits for transfer pricing purposes.

To enhance tax certainty, I recommend that US state tax authorities allow retailers to use the profit margin based on this formula as a transfer pricing safe harbor.

The regression method proposed here can be applied to any industry, including to provide safe harbors for inbound controlled wholesale distributors or to provide safe harbors for outbound controlled suppliers or for outbound controlled service providers.