Tax Notes International, June 22, 2009
The period from the early 1980s through mid-2008, during which
many transfer pricing methods and their application matured, was
one of generally strong profitability for multinational companies.
Although there were downturns, most were shallow and short-lived
and created no unusual transfer pricing challenges. Companies could
develop transfer pricing policies with the knowledge that
compliance issues would mainly involve selecting the best method
for measuring results and identifying uncontrolled comparables used
to benchmark those results. In an environment characterized by
healthy profits and steady economic growth in most countries, there
was little concern that increasing the profits from controlled
transactions in one jurisdiction might create a loss in another
jurisdiction. Business cycles continued and companies did incur
losses, but downturns generally could be dealt with through
existing transfer pricing principles.
The current economic downturn, in contrast, is bringing several
basic transfer pricing issues to the fore. These include the
ability of controlled taxpayers to modify existing advance pricing
agreements to take account of adverse business conditions and to
change their existing business structures, including long-standing
allocations of risk. Controlled taxpayers and practitioners are
also devoting greater attention to the transfer pricing analysis of
events (or costs) such as plant closures, scale-down of operations,
and employee separation. To some extent, these issues dovetail with
a broader debate that is under way concerning taxpayers'
ability to modify their existing business arrangements in
conformity with the arm's-length principle.1
Traditional transfer pricing and business restructuring issues will
likely continue to intersect. On a more practical and immediate
level, however, taxpayers need to evaluate their transfer pricing
policies and compliance strategies in light of deteriorating
financial results. For example, how does a durable goods
manufacturer price transactions with its distribution subsidiary,
when pricing at a break-even cost-plus margin would still result in
a loss for the distributor? If a transfer price less than the cost
of production is necessary for a positive distribution return, will
that pricing expose the distributor to a charge of dumping or
unfair trade practices in the local market? Assuming that a
taxpayer has not changed its basic U.S. business structure or its
allocation of risk, and assuming that it wants to keep the same
basic transfer pricing methods or analysis that it used in previous
years, the best approach may be to apply multiple-year analysis and
to perform a more thorough analysis of comparability with
uncontrolled companies.
Multiple-Year Averaging
The U.S. transfer pricing regulations and corresponding OECD
guidance recognize that multiple-year data may be useful in
evaluating whether the results of a taxpayer's controlled
transactions are arm's length.2 These rules
acknowledge that, particularly when applying profit-based transfer
pricing methods, it is necessary to take account of business cycles
and special circumstances, such as the startup of a business, that
cannot be fully addressed through comparability adjustments. Absent
those rules, a profit-based method might indicate that a transfer
pricing adjustment is called for simply because the tested party is
at the bottom of its business cycle when the uncontrolled
comparables are at the peak of theirs. That is, pricing of the
controlled transactions might be arm's length, but the
taxpayer's results could be outside the (single-year)
arm's-length range determined by reference to the comparables.
A multiple-year analysis, which is primarily intended to address
such cyclical effects, may also be relevant when a broader downturn
affects the whole economy.
The Rules in Detail
Multiple-year averaging is commonly used when applying
profit-based methods such as the comparable profit
method.3 In fact, under the CPM, data for the
uncontrolled comparables generally ''should encompass at
least the taxable year under review and the preceding two taxable
years.''4 The regulations also provide for use
of a longer period if necessary to evaluate business cycles, life
cycles, or the product under examination.5 The
underlying rationale is that the period subject to review should be
long enough to ''reduce the effect of short-term variations
that may be unrelated to transfer pricing.''6 A
multiple-year analysis evaluates the taxpayer's results and the
corresponding arm'slength ranges for the tax year under
examination and for the applicable multiple-year
period.7 If the taxpayer's results for the single
year fall outside the arm'slength range for that year, the
taxpayer's multiple-year results are compared with the
multiple-year range.8 If the taxpayer's
multiple-year results fall outside the corresponding multiple-year
range, the question is whether an allocation for the single year
would move the taxpayer's multiple-year result closer to the
arm's-length range for the multiple-year period or any point
within the range.9 If so, an allocation for the single
year is permissible. This analysis is illustrated in Example 4 in
Treas. reg. section 1.482-1(f)(2)(iii)(E) and examples 2 and 3 in
Treas. reg. section 1.482-5(e).
Opinions differ on how the multiple-year provisions should be
applied. Taxpayers have historically viewed the regulations as
providing two chances to pass — that is, if the
taxpayer's results fall within either the single-year range or
the multiple-year range, no section 482 allocation is appropriate.
However, some IRS agents evidently view the regulation as providing
transfer prices two chances to fail. Under that interpretation, a
section 482 allocation is appropriate unless the taxpayer's
results pass both the single-year and the multiple-year tests.
Although not as critical, some confusion also surrounds the
requirement that the allocation for the single year must move the
taxpayer's multiple-year average result closer to the
multiple-year average range for the uncontrolled
comparables.10
Apart from the regulations, Treasury and the IRS have issued no
formal guidance on multiple-year averaging. FSA 199945011, however,
does provide some insight into the thinking of the IRS National
Office.11 That field service advice concluded that an
allocation involving multiple-year data should place the
taxpayer's operating profits at the median (or the mean) of the
comparable operating profits for the single tax year at issue
— that is, the midpoint of the arm's-length range for
that year. It also concluded that a section 482 allocation is
appropriate only if the taxpayer's results are outside both
arm's-length ranges (single-and multiple-year) and the
single-year adjustment moves the taxpayer's multiple-year
average results in the ''right direction.'' The
field service advice, although not an official statement of IRS
position, thus adopted the (generally) taxpayer-friendly
''two chances to pass''
interpretation.12
The diagram shows a hypothetical application of the multiple-year
averaging concept. The taxpayer's results are outside the
arm's-length range for year 3, and its average results are also
outside the arm's-length range on a multiple-year basis. The
section 482 allocation indicated in the diagram is to the median of
the arm'slength range for year 3, although as noted above, the
size of the adjustment that should be made in those cases is
unclear.
Application in Broader Economic Downturn
One scenario that is likely to occur is as follows. A foreign
durable goods manufacturer operates a subsidiary in the United
States. The results of the controlled transactions with the U.S.
subsidiary are tested under the CPM using a rolling three-year
average, and these results are within the arm's-length range
for each of the years 2004 through 2007. In 2008, although pricing
of the controlled transactions is unchanged, the tested party
experiences sharply reduced demand, leading to reduced revenues and
operating profits. The uncontrolled comparables that were
historically used to benchmark profitability may or may not have
experienced similar declines in their operating results during the
same period. Business cycles or factors specific to the tested
party may result in the uncontrolled comparables experiencing the
downturn earlier or later than the tested party, or to a different
degree than the tested party.13
The question facing a taxpayer in this situation is how much
taxable income to report for 2008. If the taxpayer's
multiple-year results for 2006 through 2008 are within the
arm's-length range for those years, FSA 199945011 suggests that
no section 482 allocation is required for 2008. The taxpayer would
then presumably file its tax return based on the transfer prices
''actually charged'' during the year.
More challenging issues arise if the taxpayer's results for
2008 and for the multiple-year period fall outside the
corresponding arm's-length ranges. In that case, an adjustment
is probably indicated, but the amount is unclear. The informal
guidance in FSA 199945011 suggests that the taxpayer should adjust
its results for 2008 to the median (or the mean) of the
arm's-length range for that year, although a taxpayer in this
situation might often wish to make a smaller adjustment to some
other point within the (single-year) arm's-length range.
By their terms, the multiple-year averaging provisions appear to
deal only with section 482 allocations made by the IRS —
allocations that by definition take place in an examination
setting.14 They do not explicitly address self-initiated
section 482 allocations by the taxpayer, which, at least in the
case of a reduction of U.S. income, need to be made on a timely
filed U.S. tax return for the year in question. If a taxpayer makes
a self-initiated section 482 allocation in ''real
time'' (before the filing of the tax return), it appears
that the taxpayer can adjust its results to any point in the
single-year range, assuming the other conditions for the allocation
are satisfied. But the regulations are not clear on this
point.
Multiple-year averaging can reduce the harshness of the results
produced by a ''one-sided'' transfer pricing method
such as the CPM. But it does not address what some might see as a
more fundamental issue: How would similarly situated uncontrolled
parties deal with a major change in economic conditions, such as a
prolonged downturn? Occasionally taxpayers have used evidence
concerning the response of uncontrolled parties to events such as
currency devaluations or commodity price spikes in an effort to
determine whether and how uncontrolled parties modify their prices
in response to economic shocks. Applying such a two-sided analysis
or otherwise trying to simulate the type of bargaining that takes
place between uncontrolled parties presents substantial challenges.
Also, such approaches may be difficult to reconcile with a
one-sided transfer pricing method such as the CPM.
In any event, the multiple-year averaging provisions are likely to
play an important role as controlled taxpayers apply the CPM and
other profit-based methods to years affected by the economic
downturn. The analytical and procedural questions presented are
substantial. In the scenario described above, if the single-year
2008 results move the taxpayer's three-year average outside the
multiple-year range, could a four-or five-year average be used
instead? What if the taxpayer historically analyzed prices on a
single-year basis? Can the taxpayer now adopt a multiple-year
analysis for compliance purposes?
Even more complex issues are likely to surface as these cases go
through the IRS examination process. To name one, assuming the
common situation in which the tested party's sales and profits
are both depressed, the multiple-year results under the CPM may
differ substantially depending on whether the profit-level
indicator used to determine comparable operating profits is based
on sales or assets.15 The multiple-year averaging rules
may produce unanticipated results, particularly when the effect of
the economic downturn on the tested party differs from its effect
on the uncontrolled comparables. Treasury and the IRS should
consider updating the rules in this area, or at least providing
more detailed illustrations of how the existing rules would apply
in common settings.
Alternative Approach: Pooling of Results
Another approach that is sometimes applied to multiple-year data
involves pooling the results derived from the uncontrolled
comparables. This approach treats each observation (for example,
the comparable operating profits derived from the operating margin
of an uncontrolled company for a particular year) as a discrete
data point, rather than averaging or weight-averaging the available
observations for each comparable over the multiple-year period,
which is the standard approach. Pooling becomes relevant when a
complete data set is unavailable — for example, when a
large segment of the industry ceases operations or several
companies otherwise become unsuitable for use as
comparables.16 The IRS doesn't favor pooling. The
APA program training materials observe that averaging is the
preferred approach to multiple-year data, but note that pooling has
sometimes been used when shown to produce more reliable results
than averaging.17
Pooling can produce a very different arm's-length range than
averaging, and this may benefit either the taxpayer or the IRS.
Pooling can also have undesirable effects, such as giving undue
weight to individual observations of comparable operating profits
under a sales-based profit-level indicator when the tested
party's sales show large variations across the multiple-year
period. Because pooling is relevant when the time series of data is
incomplete, it may come into play when comparable companies are
excluded because of persistent operating losses, bankruptcy, or
termination of operations, or when taxpayers examine a
multiple-year period longer than the standard three-year period
specified in the CPM regulations. As developed further below, all
of these scenarios are likely to be encountered more frequently in
coming years, as the full impact of the economic downturn is
felt.
Taxpayer-Initiated Adjustments
The section 482 regulations apply to both the IRS and taxpayers. A
taxpayer cannot compel the IRS to apply section 482, but the
regulations permit a taxpayer to adjust its U.S. taxable income if
necessary to reach an arm's-length result (reductions must be
made on a timely filed U.S. income tax return, but increases can be
made regarding any open tax year).18 This allows
taxpayers to take into account unanticipated developments or to
make other true-ups necessary to bring the tested party's
results within the arm's-length range.19
Recent declines in revenue and profits in many sectors of the U.S.
economy suggest that taxpayer-initiated adjustments may become more
prevalent. For example, assume that a controlled U.S. distributor
of heavy construction equipment was on pace in mid-2008 to meet its
target operating margin of 5 percent for the full year. As economic
conditions deteriorated in August 2008, several of the
company's customers cancelled orders as they sold down existing
inventories. Price reductions and extended payment terms were
adopted to maintain sales volume, but revenue for the balance of
2008 continued to decline, resulting in a fourth-quarter operating
margin of -15 percent. To meet its target operating margin of 5
percent for 2008, the company would need to report more U.S.
taxable income than would result under the transfer prices
charged.
Conversely, the economic downturn might suggest the need for a
taxpayer-initiated adjustment that reduces U.S. taxable income. For
example, assume a U.S. subsidiary provides a budgeted amount of
services — say $10 million per year — to its
foreign parent. Historically, the return to the subsidiary under
the CPM20 was set at 9 percent, by reference to the profits earned
by uncontrolled providers of similar services. Updating of the
service provider comparables in 2008 indicates that because of
deteriorating economic conditions, the top of the interquartile
range is now 6 percent. In that situation, the taxpayer would
likely consider reducing the return to the U.S. service provider in
2008 to 6 percent at the most.
Ironically, the multiple-year averaging provisions may limit the
taxpayer's ability to make a self-initiated adjustment of its
U.S. taxable income — in either direction.21
Under the regulations, a taxpayer may apply section 482 only if
necessary to reflect an arm's-length result.22 Based
on the prevailing view that multiple-year averaging gives transfer
prices two chances to pass, a self-initiated adjustment might be
precluded by reference to the taxpayer's multiple-year average
results,23 although that same adjustment would be
appropriate if the results for the single year were examined in
isolation. In preparing income tax returns for the first year in
which the full impact of the economic downturn is felt, taxpayers
should keep in mind that the multiple-year averaging provisions
might limit their ability to use the self-initiated adjustment
mechanism.
Comparability
The discussion above focused on several issues that are likely to
persist during the economic downturn. Even after economic recovery
begins, the downturn may have lingering effects in the form of
reduced availability of uncontrolled comparables. Taxpayers and tax
administrations have recently come to rely more on the CPM and
other profit-based methods for determining an arm'slength
result.24 Application of the CPM and similar methods is
based on the ability to identify a sufficient number of
uncontrolled companies that are comparable to the tested party and
that can be used to construct a reliable range of comparable
operating profits.
In most cases, the tested party under a CPM performs routine
functions characterized by relatively low risk, and consequently
the tested party is expected to earn positive returns. Correctly or
incorrectly, uncontrolled companies that have persistent operating
losses or that show other signs of distress are often eliminated
from the set of potential comparables, almost as a threshold
matter. An uncontrolled company with operating losses in one year
or in two successive years might be kept as a comparable, but a
company with operating losses over an extended period, or whose
status as a going concern is in doubt, is generally rejected. This
approach reflects an instinctive reaction — one that is
often borne out by a more detailed analysis of the facts
— that an uncontrolled company with persistent losses has
a risk profile different from that of the tested party (which is
generally low-risk). Companies operating under chapter 11 or
chapter 7 are also excluded, for different reasons. The prevailing
view is that a bankrupt company operates under conditions (for
example, ongoing judicial supervision or maximization of returns to
secured creditors rather than shareholders) that distinguish it
from the tested party, which is deemed to operate under traditional
free-market conditions with the goal of maximizing
profits.25
Over the past year or so, companies across a broad swath of the
U.S. economy have been affected by the economic downturn. This may
call into question the ability to apply the CPM and similar
profit-based methods, if the screening techniques described in the
previous paragraph are applied in the traditional manner. And when
economic distress is particularly acute in an industry segment, it
may be impossible to identify a suitable set of comparables in that
sector, again assuming that such screening techniques are applied
in the usual way.
In some settings, such as a contested IRS examination, an APA
negotiation, or a mutual agreement proceeding, screening of
comparables may yield to a more in-depth analysis of
comparability.26 There it is common to review annual
reports and other public financial data to determine why a company
had adverse operating results. A detailed analysis of this type
might show that the level of comparability between the uncontrolled
company and the tested party is acceptable.
When an uncontrolled company generates operating losses in
successive years, the underlying reasons for those losses might, on
closer analysis, be found to apply equally to the controlled
taxpayer. Or it may be possible to use a company with adverse
operating results as a comparable, provided that reliable
adjustments can be made to account for differences between that
company and the tested party. Unfortunately, pragmatic
considerations tend to win out over the results of a comparability
analysis. For example, it is not unheard of for loss companies to
be excluded because they move the arm's-length range into very
low (or negative) operating profits.
An in-depth comparability analysis should indicate whether an
uncontrolled company in bankruptcy is operating under conditions
that are dissimilar to those faced by the controlled
party.27 If material differences in contractual terms or
other conditions are identified, it may be possible to make
adjustments that reliably account for those
differences.28 Analyzing specific companies at this
level of detail is costly, at least in comparison with screening
techniques that simply eliminate all bankrupt companies. In this
economic environment, however, the blanket exclusion of all
uncontrolled companies operating in bankruptcy may reduce the
overall reliability of a CPM analysis.
Most public U.S. companies will survive the economic downturn, and
most will earn operating profits (though perhaps diminished)
despite more challenging business conditions. Some companies,
however, will have sharply reduced profits or losses, and some of
those may eventually declare bankruptcy or cease operations
altogether. Under these conditions, the composition of the database
of uncontrolled comparables, particularly the decision whether to
exclude companies on the basis of negative operating results or
bankruptcy, takes on greater importance.
Historically, the IRS and many other tax administrations have
assumed that a taxpayer that has a guaranteed flow of transactions
from another controlled party should earn non-de-minimis operating
profits, without regard to adverse operating conditions that may
have arisen in the taxpayer's industry. (There are exceptions
— for example, taxpayers in high-risk sectors, start-up/
shutdown scenarios, or market penetration.) Even if that assumption
is valid in the abstract, it will nonetheless come under scrutiny
in this environment, particularly in sectors especially hard hit by
the economic downturn. The operating assumption that all parties
that do business on an arm's-length basis must earn profits may
be suspect when most or all of the uncontrolled companies operating
in the industry sector are generating losses.
A More Difficult Case
In some cases, the economic downturn may exacerbate a process of
contraction or consolidation already under way in an industry
sector. In the extreme case, most or all uncontrolled companies in
a sector might exit the business, be acquired, or no longer be
viewed as appropriate comparables (for example, because of going
concern issues, operating losses, or bankruptcy).
Consider the case of a vertically integrated manufacturer that
historically tested discrete elements of its operations under the
CPM. It is common for such a manufacturer to use CPM comparables to
benchmark one or more low-value production activities —
for instance, tabletting by a pharmaceutical company or
metal-stamping by a manufacturer of home appliances. The economic
downturn may mean the end of the line for uncontrolled companies
that have historically performed such routine functions on a
stand-alone basis. In these situations, it may be necessary to
reapply the best method rule, taking into account the changed
conditions in the industry.29 Ultimately, a more
pragmatic view of comparability and reliability may also be
necessary. For example, one might consider using as comparables
uncontrolled companies that are generating persistent losses or are
in bankruptcy. Or one may need to use segment data (if available)
for an uncontrolled acquirer of the former comparable or to
identify uncontrolled companies that have less direct comparability
to the relevant business activities of the tested party.
For their part, the IRS and other tax administrations should use
flexibility in evaluating whether results are arm's length
under these circumstances. Tax administrators should avoid
second-guessing a controlled taxpayer's decision to continue
performing specific low-value activities that constitute elements
of an integrated production process. A controlled party's
decision to perform a function should not be questioned because it
has become more difficult to evaluate the arm's-length return
to that function, due to changes in industry composition.
Conclusion
Taxpayers will continue to face substantial challenges as they
report U.S. taxable income under the arm's-length standard.
Given the increased reliance in recent years on the CPM and similar
profit-based methods, it may be necessary to reconsider some of the
fundamental principles that have informed application of those
methods. These methods should continue to provide reliable results
in most cases, if taxpayers, practitioners, and tax administrators
apply them in a flexible and pragmatic manner, taking into account
the changed business and economic environment.
FOOTNOTES:
1. See generally OECD, ''Public Discussion Draft on
Transfer Pricing Aspects of Business Restructurings''
(Sept. 19, 2008),
available at http://www.oecd.org/document/7/0,3343,en_2649_33753_41328775_1_1_1_1,00.html.
The draft was released for comment in 2008, but the project began
in 2005.
2. Treas. reg. section 1.482-1(f)(2)(iii); OECD, Transfer Pricing
Guidelines for Multinational Enterprises and Tax Administrations,
paras. 1.49-1.51.
3. See also discussion of the transactional net margin method in
the OECD transfer pricing guidelines, paras. 3.26 and
following.
4. Treas. reg. section 1.482-5(b)(4).
5. See Treas. reg. section 1.482-1(f)(2)(iii)(B).
6. Treas. reg. section 1.482-1(f)(2)(iii)(D).
7. Treas. reg. section 1.482-1(f)(2)(iii)(B).
8. Treas. reg. section 1.482-1(f)(2)(iii)(D).
9. Id.
10. Some interpret ''only to the extent that'' to
mean the singleyear allocation must bring the taxpayer to the edge
of the interquartile range for the multiple-year period. In
contrast, FSA 199945011 (infra) suggests that the allocation for
the single year must have the ''correct sign'': It
cannot move the taxpayer's multiple-year results (results that
by definition are outside the interquartile range for the
multiple-year period) further away from the multiple-year range.
See also Treas. reg. section 1.482- 1(f)(2)(iii)(D).
11.The main issue in the field service advice was the appropriate
analysis under the CPM of antidumping duty cash deposits that a
U.S. subsidiary had posted under 19 U.S.C. section 1673(e)
— deposits that the U.S. government refunded to the
subsidiary in a subsequent tax year.
12. As developed further below, this interpretation may cause
difficulties when the taxpayer seeks to make a
''self-initiated'' adjustment under Treas. reg.
section 1.482-1(a)(3).
13. As a practical matter, taxpayers must cope with the fact that
financial data for the uncontrolled comparables may lag the data
for the tested party by at least six months. In developing a
compliance strategy, taxpayers must coordinate data availability
with the due dates for income tax returns and contemporaneous
transfer pricing documentation — due dates that often
differ from one jurisdiction to another.
14. This can be seen, for example, in the reg's cross-reference
to section 1.482-1(g)(2)(iii), which defines a prior-year section
482 allocation that is ''finally determined.'' See
Treas. reg. section 1.482-1(f)(2)(iii)(D) (final sentence). None of
the events that constitute a final determination correspond exactly
to a taxpayer initiated adjustment, although ''payment of
the deficiency'' (Treas. reg. section
1.482-1(g)(2)(iii)(C)) would arguably permit a prior-year
self-initiated adjustment to be taken into account in calculating
the taxpayer's multiple-year average results in subsequent tax
years.
15. Under a sales-based profit-level indicator, comparable
operating profits are weighted to the tested party's sales,
which are likely to be depressed in the first year of the economic
downturn, as compared with previous years. In contrast, the level
of the tested party's operating assets or capital employed is
less likely to decrease substantially from one year to the next,
even during an economic downturn.
16. If the time series of data is complete, pooling and averaging
should produce identical (or nearly identical) results.
17. APA Study Guide at 44. The IRS APA training materials are
available at http://www.irs.gov/businesses/corporations/article/0,,id=96186,00.html.
The APA office cautions that the training materials should not be
relied on or otherwise cited as precedent by taxpayers.
18. Treas. reg. section 1.482-1(a)(3).
19. A taxpayer-initiated adjustment that increases U.S. taxable
income may prevent a section 482 allocation by the IRS and may also
eliminate associated penalty exposure. But regardless of the
direction of the self-initiated adjustment, a U.S. taxpayer seeking
a corresponding adjustment in a foreign country generally must
request assistance from the U.S. competent authority. The
considerations relevant to these adjustments are discussed in
greater detail in H. David Rosenbloom, ''Self-Initiated
Transfer Pricing Adjustments,'' Tax Notes Int'l, June
4, 2007, p. 1019, Doc 2007-12382, or 2007 WTD 111-6.
20. Assume that the conditions for use of the CPM for services
method are satisfied. See temp. Treas. reg. section 1.482-9T(f).
Also assume that the services are not eligible for the services
cost method in temp. Treas. reg. section 1.482-9T(b).
21.The section 482 allocation at issue in FSA 199945011 was
initiated by the taxpayer, not the IRS.
22.Treas. reg. section 1.482-1(a)(3). See also IRS general legal
advice memorandum, AM-2007-007 (Mar. 15, 2007) (addressing the
commensurate with income standard).
23. That is, the taxpayer's multiple-year average results
might be within the range of multiple-year average results for the
comparables, or the potential allocation for the single year might
move the taxpayer's multiple-year results away from the range
of multiple-year average results for the comparables.
24. In the case of a U.S. subsidiary of a foreign parent, the
subsidiary's operating profit generally is tested directly
against U.S. comparable companies with similar functions and risks.
In the case of a U.S. parent, the results of the foreign subsidiary
often are tested against suitable comparables, and if those results
are determined to be arm's length, the residual profit earned
by the U.S. parent is deemed to be arm's length.
25. Other conditions that may affect comparability include
financial assistance or loan guarantees from the federal
government, both of which have become more common in some sectors.
See, e.g., ''U.S. Offers $5 Billion to Car
Suppliers,'' The Wall Street Journal, Mar. 20, 2009,
available at http://www.wsj.com.
26. For a general discussion of loss comparables that predates the
economic downturn, see OECD, Comparability: Public Invitation to
Comment on a Series of Draft Issues Notes, at 72-74 (May 2006). The
document is on the OECD Web site, available at http://www.oecd.org/document/12/0,3343,en_2649_37989753_36651660_1_1_1_1,00.html.
27. Paradoxically, a bankrupt company may have contractual terms
with third parties that are more favorable than the terms the
controlled party has in its contracts with third parties. For
example, a bankruptcy court may require the company's customers
to accept passthrough of increases in raw material costs, or it may
void a collective bargaining agreement that specifies above-market
wages and benefits to the company's employees.
28. In the case of a bankrupt company that has a more favorable
labor contract, the comparable's labor costs might be adjusted
upward to reflect the prevailing wage rates in the applicable
industrywide collective bargaining agreement.
29. The OECD transfer pricing guidelines (para. 1.12) observe that
in some cases, information necessary to apply the arm'slength
principle may be difficult to obtain or may not exist. In this
context, the guidelines also note that transfer pricing is not an
exact science, but calls for ''the exercise of judgment on
the part of both the tax administration and the taxpayer.''
Id.
This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.