This book examines whether, and to what extent, transactional adjustments may be applied within transfer pricing, i.e. whether it is possible to alter conditions and circumstances (other than prices or margins) of transactions conducted between related parties.
In the context of the comparability analysis demanded by transfer pricing rules, the conditions and circumstances of controlled transactions normally serve to define the magnitude of its identity with an uncontrolled comparable reference, to determine if primary adjustments on profits need to be implemented. Nevertheless, it is relevant to question whether these very factors could also be subject to adjustments, since altering the features of controlled transactions, such as the attribution of risks, the re-allocation of intangible assets or even the entire disregarding of a loan transaction, will undoubtedly have an impact on the profits of the assessed entity.
In this book, it is shown that transactional adjustments are not only possible but also inherent to the arm’s length principle. However, a clear and precise delineation of stringent boundaries, both in the scope and the manner in which adjustments are to be applied, is essential to mitigate undue discretion. Through the examination of such limits, defined in accordance with the arm’s length principle, a model on the enforcement of transactional adjustments is proposed. This model is of interest not only for determining the proper implementation of the referred adjustments, but also to duly assess the appropriateness of their treatment in different frameworks, ranging from parameters defined in the Transfer Pricing Guidelines and BEPS actions referring to transfer pricing, to domestic transfer pricing rules and court decisions.
Furthermore, the impact of transactional adjustments on specific scenarios that practitioners, tax administrations and courts have to face regularly within the realm of transfer pricing is thoroughly examined – namely, on the distribution of risks, the attribution of profits generated by intangible assets, the assessment of hard-to-value intangibles, business restructurings and cost sharing agreements.
