INTM467090 - Establishing the arm's length price: gathering your own evidence

Searching for comparables: separate or combined transactions?

ICTA88/SCH28AA must be construed in accordance with OECD principles.

Ideally, the arm’s length standard should be applied on a transaction-by-transaction basis. Often however it is practicable to depart from this ideal. The most likely situations are considered in paragraph 1.42 of the OECD Transfer Pricing Guidelines and are discussed (with a couple of other situations) below.

1. When using the transactional net margin method ('TNMM') you are comparing the results, margins, return on capital, etc. of different companies. The actual intra-group transactions will be contained in the results of the company that is being tested. So while you can’t compare the actual transactions, you compare results, etc., which are based in part on those transactions.
2. When goods or services are acquired under a long-term contract it is good practice to evaluate the price of that contract rather than the individual transactions. Similarly if goods or services are acquired on terms that are effectively rolled over each time there is a purchase, then it makes sense to consider all the purchases as a whole. Remember though there is a difference in goods supplied under a long term contract and goods supplied on a transaction by transaction basis. Each situation has its own different risks that need to be addressed.
3. When goods or services are acquired under a licence agreement, the terms of the licence agreement should be considered as well as the purchases under that contract.
4. Some goods are very similar or closely linked and are often referred to as a basket of products. Provided the various goods have very similar attributes, costs of production, costs of marketing and sale price, then the goods can be considered as a whole.
5. In the case of the licensing of manufacturing know-how and the supply of vital components to an associated manufacture, it is likely to be more reasonable to consider the pricing of the know-how and components as a package.
6. Where a transaction is routed through another associated company, it may be more appropriate to consider whether this particular transaction forms part of an integrated series of transactions, which should be compared as a whole.

In all cases, a sensible, pragmatic approach should be adopted. Ensure you are comparing like with like.