U.S. transfer pricing regulations about the “rate of return on capital employed” (ROA) are misconceived because they rely on untested assumptions. For example, 26 CFR 1.482-5(b)(4)(ii), states:

- Net Profit Indicator (44)
- Valuation of Intangibles (14)
- Royalty Rates (13)
- CPM/TNMM (7)
- OECD Profit Indicators (7)
- Return on Assets (7)
- CUP Method (6)
- Arm's Length Range (5)
- Tax Litigation (5)
- Adjustment (3)
- Economic Substance (3)
- Intercompany Financing (3)
- Net profit (3)
- OECD BEPS Action (3)
- OECD Guidelines (3)
- Safe Harbors, Safe Harbours (3)
- Best Method (2)
- Brazil Transfer Pricing (2)
- Comparability Analysis (2)
- Loan Interest Rates (2)
- Location Savings (2)
- OECD adjustment is spurious (2)
- Tax Law (2)
- Transfer Pricing Methods (2)
- Australia (1)
- Benchmark Energy Prices (1)
- Berry Ratio (1)
- CAPM (1)
- Cloud Computing Transfer Pricing (1)
- Cumulative effect of advertising on sales (1)
- IRS Releases FY 2015 Data Book (1)
- IRS Releases New Practice Unit (1)
- India (1)
- Keyword search (1)
- Limited Risk (1)
- Marketing intangibles (1)
- Text Redaction and Royalty Rates (1)
- US APMA News & Statistics (1)
- US Transfer Pricing Regulations (1)
- Working Capital (1)

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.

*“We shall renounce . . . the subterfuges*.”

*Y si pretendes remover las ruinas que tú mismo hiciste ...*

*Cenizas* sung by Toña La Negra. Bolero lyrics by Wello Rivas (1913-1990).

We suggested on prior blogs that operating assets (measured by *property, plant & equipment*) are endogenous and that structural equation estimates of return on assets produce biased coefficients. Here, we provide another alternative from biased estimates of return on assets than using exotic algorithms like two-stage least squares.

*Models should have mathematical beauty *(*they must be parsimonious*).

Paraphrasing Paul Dirac (1955), *Physical laws should have mathematical beauty*, quoted in Abraham País, Maurice Jacob, David Olive, Michael Atiyah, *Paul Dirac* (The Man and his Work), Cambridge University Press, 1998, p. 46.

Posted by
**Ednaldo Silva**

*R**eturn on assets* (ROA also called ROIC) is ill-defined and the selection of this profit indicator in transfer pricing can lead to intractable controversy between the tax administration and corporate taxpayers.

Assets (which combine liabilities and equity) are an accounting quagmire. The nebulous definitions provided by the OECD *Transfer Pricing Guidelines* (2017), ¶¶ 2.103 and 2.014 create more pain than relief. Likewise, the definitions provided by US 26 CRF 1.482-5(b)(4)(i) and (d)(6) are misconceived because they aggregate heterogeneous accounts disrespecting short-versus long-term assets (acquisition dates), assets associated and not associated with interest deductibility, different economic cycle dynamics, and different depreciation schedules.

Content not found

Your privacy is critically important to us. RoyaltyStat applies the following principles:

- RoyaltyStat values the privacy of its clients.
- RoyaltyStat collects personal information needed to operate and improve RoyaltyStat services and to provide you with the services you request.
- RoyaltyStat does not share this information with or sell this information to any third parties, except as required by law.