Table of Contents

1. Introduction.................................................................................................................................................... 2
i. Overview................................................................................................................................................................................... 2
ii. Scope of services................................................................................................................................................................... 2
iii. Structure of the report....................................................................................................................................................... 3

2. Executive Summary....................................................................................................................................... 4
i. Overview................................................................................................................................................................................... 4
ii. Functional analysis...............................................................................................................................................................6
iii. Economic Analysis................................................................................................................................................................6
iv. Conclusion................................................................................................................................................................................ 6

3. Company Analysis.......................................................................................................................................... 7
i. Introduction............................................................................................................................................................................ 7
ii. Group Overview2.................................................................................................................................................................. 7
iii. ABC Company......................................................................................................................................................................... 7

4. Industry Analysis........................................................................................................................................ 11
i. Introduction.......................................................................................................................................................................... 11
ii. Global travel and tourism...............................................................................................................................................11
iii. KSA travel and tourism industry overview............................................................................................................12

5. Summary of Controlled Transactions.................................................................................................. 15

i. Introduction.......................................................................................................................................................................... 15
ii. Legal entities to the Controlled Transactions........................................................................................................15
iii. Transaction flow and intra-group receipts/payments by tax jurisdictions..................................15

6. Functional Analysis..................................................................................................................................... 17
i. General.................................................................................................................................................................................... 17
ii. Functions performed........................................................................................................................................................17
iii. Risks assumed..................................................................................................................................................................... 19
iv. Assets employed.................................................................................................................................................................21
v. Summary of functional analysis...................................................................................................................................21

7. Economic Analysis...................................................................................................................................... 22
i. Introduction.......................................................................................................................................................................... 22
ii. Transfer pricing methods...............................................................................................................................................22
iii. Selection of most appropriate method.....................................................................................................................24
iv. Conclusion............................................................................................................................................................................. 26

Appendix 1: KSA TP Regulations.......................................................................................................................... 27

Appendix 2: OECD TP Guidelines......................................................................................................................... 29

1.1 Arm’s Length Principle....................................................................................................................................................29
1.2 Traditional transaction methods.................................................................................................................................30
1.3 Transactional profit methods........................................................................................................................................32
1.4 Intercompany services.....................................................................................................................................................33
1.5 BEPS Actions........................................................................................................................................................................ 39

Appendix 3: Intercompany agreements............................................................................................................ 40

Appendix 4: Annual Financial Statement of ABC Company...................................................................41

1. Introduction

i. Overview

XYZ Form (hereafter referred to as “we” or “XYZ” or “us”) has been engaged to assist in
preparing local transfer pricing (“TP”) documentation for ABC Company (“ABC Company” or
“the Company”) for the fiscal year ending March 31, 2023 (“FY2023”).

The report has been written to conform to the requirements of the Kingdom of Saudi Arabia
(“KSA”) TP rules contained in the Transfer Pricing Bylaws 1 (Article 17) (“KSA TP Bylaws”),
Transfer Pricing Guidelines issued by the Zakat, Tax and Customs Authority (“ZATCA”)
(“KSA TP Guidelines”) (Third Edition November 2021), and the Income Tax Law of the KSA
(“KSA Tax Law”) - hereafter, collectively referred to as the “KSA TP Regulations”.

In addition, the principles outlined in the Organization for Economic Co-operation and
Development’s (“OECD”) Transfer Pricing Guidelines for Multinational Enterprises and Tax
Administrations, January 2022 (“OECD TP Guidelines”) have also been referred for
preparation of this report, wherever any matter is not addressed in the KSA TP Regulations.

The purpose of this report is to review and document the following intercompany
transactions of ABC Company (hereafter referred as “Controlled Transactions”) and to
determine whether these intercompany transactions were performed at arm’s length.

► Transaction 1: Hotel Accommodation

ii. Scope of services

The TP analysis in this report is based on KSA TP Regulations. The KSA TP Regulations are
summarized in Appendix 1 of this report. In addition, we have also referred the OECD TP
Guidelines, which are summarized in Appendix 2.

Our understanding of the activities of ABC Company, analyzed in this report is based on
discussions with personnel of ABC Company, information available in the public domain,
and other documents supplied by ABC Company. We have asked ABC Company to review
the report and confirm that there are no material misunderstandings or misrepresentations
of the facts gathered during its preparation. We have not independently audited or
otherwise verified any of the facts, assumptions or representations contained in this report.
Any changes in the facts, assumptions or representations upon which we have relied, may
require a modification of all or part of these conclusions.

This report represents our conclusions only and should not be taken as an assurance of the
ultimate treatment of the Controlled Transactions by ABC Company and/or tax authorities
of other jurisdictions in which ABC Company corporation and its group entities (“Travel

1 Transfer Pricing Bylaws issued by the General Authority of Zakat and Tax pursuant to Board Resolution No [6-1-19] Dated

25/05/1440H corresponding to 31/01/2019

1|Page
Designer”) operates in. The analysis contained in this document is not binding on the tax
authority and should not be considered as an assurance that the tax authority will
necessarily agree with our conclusions or that ABC Company and related persons will
prevail if a contrary position is adopted by the tax authority. Any other tax matter, including,
but not limited to, other corporate income tax aspects, value added tax (“VAT”) or customs
issues, as well as accounting and legal matters, which may or may not relate to the
intercompany transactions under review, fall outside the scope of this report.

iii. Structure of the report

This report contains seven sections and four appendices.

 Section 1 provides details on the scope of the report while Section 2 presents the
executive summary of the report.
 Section 3 provides an overview of ABC Company overall business and sets out the
background to operations of ABC Company.
 Section 4 provides an industry analysis to provide the context for which the Controlled
Transactions took place. In this section, we have summarized the main features of the
industry in which ABC Company operates, with a focus on growth trends globally and in
the KSA.
 Section 5 explains in detail the nature of the Controlled Transactions; while Section 6
contains a functional analysis, which outlines the functions performed, risks assumed,
and assets employed by ABC Company and its related persons with respect to the
Controlled Transactions.
 Section 7 contains the economic analysis and an overview of the transfer pricing
methods that were used to examine the Controlled Transactions. These sections of the
report also set out why a particular transfer pricing method was chosen and how it was
applied to the Controlled Transactions by reference to a comparability analysis.

More information about the KSA TP Regulations, OECD TP Guidelines, comparability

analysis and technical aspects of our comparability analysis can be found in the
appendices.

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2. Executive Summary

i. Overview
XYZ prepared this report to review and document the Controlled Transactions entered
by ABC Company with its related persons in FY2023 to determine whether they meet
the arm’s length principles as set out in the KSA TP Regulations.

Table 1: Information on sections of the report

Sr.
Contents of Local File (Article 17 of KSA TP Bylaws) Reference
No.
ABC Company’s information, including:

a) a description of the management structure of ABC Company, its

organization chart, a description of the individuals to whom ABC
Section 3.3
Company’s management reports and the countries in which such
individuals maintain their principal offices;
1
b) a detailed description of the business and business strategy pursued by
ABC Company including an indication whether ABC Company has been
involved in or affected by business restructurings or transfer of intangible
Section 3.3
property, in the current Reporting Year and the Reporting Year
immediately preceding it, and an elaboration on aspects of such
Transactions that affect the local entity and its key competitors;

Documentation on material Controlled Transactions. For Controlled

Transactions in which ABC Company is involved generally, the
following information should be included:

a) a description of the Controlled Transactions (e.g. purchases for hotel

accommodation etc.) and the context in which such Transactions take Section 5
place;

b) the amount of intra-group payments and receipts for each category of

Controlled Transactions involving ABC Company (e.g. payments for
Section 5
services) broken down by country of tax residence the foreign payer or
recipient;

2 c) an identification of Related Persons involved in each category of

Section 5
Controlled Transactions, and the relationships amongst them;
d) copies of all intercompany agreements concluded by ABC Company; Appendix 3

e) a detailed comparability and functional analysis of ABC Company and

relevant Related Persons with respect to each documented category of Section 6 & 7
Controlled Transactions, including any changes compared to prior years;

f) an indication of the most appropriate transfer pricing method with

regard to the category of Transaction and the reasons for selecting that Section 7
method;

g) an indication of which related Person is selected as the tested party, if

Not Applicable
applicable, and an explanation of the reasons for this selection;

3|Page
 h) a summary of the important assumptions made in applying the transfer
Section 1
pricing methodology;

i) if relevant, an explanation of the reasons for performing a multi-year

Not Applicable
analysis;

j) a list and description of selected comparable Uncontrolled Transactions

(internal or external), if any, and information on relevant financial
indicators for independent enterprises relied on in the transfer pricing Not Applicable
analysis, including a description of the comparable search methodology
and the source of such information;
k) a description of any comparability adjustments performed, and an
indication of whether adjustments have been made to the results of the Not Applicable
tested party, the comparable Uncontrolled Transactions, or both;
l) a description of the reasons for concluding the relevant Transactions
were priced on an arm’s length basis based on the application of the Not Applicable
selected transfer pricing method;

m) a summary of financial information used in applying the transfer pricing

Not Applicable
methodology; and
n) a copy of existing unilateral and bilateral/multilateral Advance Pricing
Agreements and other tax rulings to which the Authority is not a party and Not Applicable
that relate to Controlled Transactions;
Industry analysis which provides complete and thorough analysis of
ABC Company industry, including but not limited to:

(a) major competitors;

(b) SWOT analysis;
(c) power of suppliers;
(d) power of buyers;
3 (e) availability of substitutes;
(f) size; Section 4
(g) demand and supply trends;
(h) entry requirements;
(i) key international target markets;
(j) market share; and
(k) modes of delivery.

Financial information, including:

a) Annual financial statements for the Reporting Year concerned of ABC

Company. If audited financial statements exist, these should be supplied Appendix 3
and if not, existing unaudited financial statements should be supplied;
4 b) Information and allocation schedules showing how the financial data
used in applying the transfer pricing method may be tied to the annual Section 3.3.h
financial statements; and
c) Summary of schedules of relevant financial data for comparable used in
Not Applicable
the analysis and the sources from which that data was obtained.

4|Page
 ii. Functional analysis
The functional analysis outlines the roles, risks, and assets of ABC Company in its
intercompany transactions, particularly with its parent company, ABC Company. The
functions involve procurement of hotel accommodations, vendor relationship
management, contract negotiation, demand forecasting, order placement, and pricing
reviews. ABC Company coordinates logistics and monitors performance to ensure
customer satisfaction. Key risks include market, foreign exchange, quality, credit, and
liquidity risks, while capacity utilization risk arises from fluctuating demand. ABC
Company's tangible assets consist only of laptops, and it has no significant intangible
assets.

iii. Economic Analysis

a) Selection of the most appropriate TP method

In order to test the arm’s length nature of Transaction 1, Cost Plus Method was chosen to
evaluate the arm’s length nature of the Controlled Transactions as permitted under the
KSA By-laws.

b) Results
The analysis determined that the "Cost Plus method" is the most appropriate transfer
pricing approach for ABC Company. Additionally, a corroborative analysis confirmed
that applying this method ensures that the revenue earned by ABC Company, after
accounting for all transactions, complies with the arm’s length standard from a KSA
transfer pricing perspective.

iv. Conclusion
Based on the above, it can be concluded that the Controlled Transactions of ABC
Company conducted during FY2023 appear to be consistent with the arm’s length
principle from a KSA TP perspective.

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3. Company Analysis

i. Introduction

This section provides the Company’s information, including description of the management
structure, organization chart, description of the individuals to whom the Company’s
management reports and the countries in which such individuals maintain their principal
offices, description of the business and business strategy pursued by the Company,
indication whether the Company has been involved in or affected by business restructurings
or transfer of intangible property.

ii. Group Overview2

ABC Company launched in 2007 in country, is the flagship product of ABC Company Group
and is one of the largest and fastest-growing online B2B travel portals in the Middle East,
South Asia, and Southeast Asia. From a humble beginning from country today, employs more
than 250 employees in 32 offices in 18 countries worldwide.

The Company is primarily engaged in the business of Reservation of transportation,

restaurants and car rental, Reservation and marketing of tourist accommodation units and
Tourism promotion activities. As mentioned, ABC Company operates businesses in a variety
of regions throughout the world namely Middle East, South Asia, and Southeast Asia.

iii. ABC Company

a) General information
ABC Company, ("one-person limited liability company") licensed under foreign
investment license No. 0101010101010010, issued by Saudi Arabia General Investment
Authority on xx/xx/xxxx (corresponding to xx November xxxx). The Company operates
under Commercial Registration number 010101010 dated on xx/xx/xxxx
(corresponding to xx December xxxx). The share capital of the Branch amounting to SR
10,000.

b) Legal ownership structure

The ownership structure of ABC Company is illustrated in the figure below.

Figure 1: ABC Company simplified legal chart

ABC Company ABC Company

100% ABC Company 100%
India Private
Limited
Source: Information provided by the client

6|Page
c) Organization and management structure
The figure below shows ABC Company’s local organization chart and management’s roles
and responsibilities.

Figure 2: ABC Company local organization chart

COUNTRY GENERAL
MANAGER MANAGER BDM

SALE MANAGER
CLERK & SALE
EXECUTIVE

Source: Information provided by the client

Following is the complete detail of management’s roles and responsibilities.

Table 2: Roles of the key functional heads3

Designation and
Key
jurisdiction to
functional
Role of the key functional head whom the key
head and
functional head
department
reports to
The Country manager is responsible for Managing
Country
Operations, Develop Business & Increase -
Manager
Profitability of the Company in Specific Region of the
Country.
General Manager is High Ranking Executive who is
GM responsible for overall performance and success of Country Manager
business units, Division or even an entire company
BDM is responsible for Driving Business, Attract New
Client, Research new Markert Opportunity, and GM & Country
BDM
oversee growth project making sale project and Manager
forecasting revenue.

Sale Manager is responsible for Hiring, Recruit and

Sale Manager BDM
Train new member of Sales staff & Managing Sale.
Sale Build Business by identifying and selling prospects
Sale Manager
Executive maintaining relationship with Clients.

7|Page
 Designation and
Key
jurisdiction to
functional
Role of the key functional head whom the key
head and
functional head
department
reports to
Handle General administrative task such as filling,
Clerk Data entry, maintaining records & Organizing GM
Documents.

Source: Information provided by the client

d) Business strategy
ABC Company should focus on market penetration by building brand awareness and
expanding its customer base in Saudi Arabia. Forming strategic partnerships with local
businesses, hotels, and airlines can help offer competitive packages. Investing in digital
marketing and technology, such as a user-friendly booking platform and data-driven
personalization, will enhance customer experience and attract more clients. Customizing
services, offering value-added experiences, and maintaining a strong focus on customer
satisfaction will help differentiate the company from competitors.

To manage costs and improve operational efficiency, ABC Company can explore
automation, strategic outsourcing, and cost optimization in its core processes.
Leveraging its parent company’s presence in Dubai for regional alliances and future
expansion into other Saudi cities can further boost growth. The company should also
prioritize regulatory compliance and align with Saudi Arabia’s Vision 2030 by
incorporating sustainability initiatives into its business strategy.

e) Business restructurings
In FY2023, ABC Company was not involved in any business restructuring transactions.

f) Intangible property transfers

In FY2023, ABC Company was not involved in any intangible transfers.

g) Key competitors
The major competitors of ABC Company are XYZ Company.

h) Financial information
The below table summarizes the financial results reported by ABC Company for FY2023.

Table 3: Financial results of ABC Company for FY2023 valued in Saudi Riyal (“SAR”)

Particulars Amount (in SAR)

Revenue
Reservations 50,000,000
Total Revenue (A) 50,000,000
Expenses
Cost of Reservations 45,000,000
General and Administration Expenses 6,000,000
Finance Cost 100,000

8|Page
 Particulars Amount (in SAR)
Total Expenses (B) 51,100,000
Operating Loss (C) = (A) – (B) (1,100,000)

During FY2023, ABC Company has incurred an operating loss of SAR 1,100,000. Primary
factors contributing to losses for ABC Company are as follows:
 These are the initial years for the company, they are arranging the setup in the
Saudi Arabia. That’s why they incurred loss in the FY 2023.
The annual FY2023 financial statement of ABC Company is provided in Appendix 4.

i) Advance Pricing Agreements and other tax rulings

In FY2023, there were no advance pricing agreements or tax rulings in relation to the
Controlled Transactions.

9|Page
4. Industry Analysis

i. Introduction
This section provides an analysis of the travel and tourism in which ABC Company
operates, discussing its trends, competition and outlook (including information
pertaining to major competitors, SWOT analysis, power of suppliers/buyers, availability
of substitutes, size, demand and supply trends, entry requirements, key international
target markets, market share, and modes of delivery, etc.), as these may directly and
indirectly impact the Controlled Transactions.

ii. Global travel and tourism

The global travel and tourism industry is expected to generate approximately $854.7
billion by the end of 2023, with a compound annual growth rate (CAGR) of 4%
projected from 2023 to 2027. This indicates a robust recovery from the pandemic,
driven by pent- up demand and increased international mobility.4

a) Global travel industry drivers5

The Travel & Tourism market has been experiencing significant growth worldwide,
driven by various factors such as increasing disposable income, ease of travel, and desire
for unique experiences.

Customer preferences: Travelers are increasingly seeking authentic and unique

experiences, moving away from traditional tourist attractions to more off-the-beaten-path
destinations. This shift in preferences has led to the rise of experiential travel, where
immersive cultural experiences and interactions with locals are highly valued.

Trends in the market: In the United States, there has been a noticeable trend towards
sustainable and eco-friendly travel practices. Travelers are becoming more conscious of
their environmental impact and are actively seeking out destinations and
accommodations that prioritize sustainability. This has led to the growth of eco-tourism
initiatives and the popularity of destinations known for their conservation efforts.

b) Global travel industry trends and challenges6

The key industry trends and challenges of the travel industry include:

Overtourism: Popular destinations are experiencing overtourism, characterized by

excessive visitor numbers that strain local infrastructure, harm the environment, and
negatively impact the quality of life for residents.
Safety and Security Concerns: Safety and security issues, including terrorism, political
instability, and natural disasters, can significantly impact destination choices and
traveler confidence.
Global Health Crises: Events like pandemics (e.g., COVID-19) can severely disrupt
global travel. Health-related concerns, travel restrictions, and safety measures have
profound implications for the tourism industry.

4 https://www.connectingtravel.com/news/global-travel-and-tourism-revenue-projected-to-reach-us-854.7-billion-in-
2023
5 https://www.statista.com/outlook/mmo/travel-tourism/worldwide#analyst-opinion
6 https://www.linkedin.com/pulse/what-global-trends-challenging-tourism-organizations-today-s%C3%A1bio-cnfdf

10 | P a g e
 Climate Change: The tourism industry is vulnerable to the impacts of climate change,
including extreme weather events, rising sea levels, and disruptions to ecosystems.
Shifts in weather patterns can affect travel patterns and destination attractiveness.

c) Travel industry segmentation7

There are several different ways to segment the travel market. The four main tourism
market segments include:
a. Demographic segmentation in tourism (age, gender, income, education, and
other demographic factors)
b. Geographic segmentation in tourism (location, such as country, region, or city)
c. Psychographic segmentation in tourism (lifestyle, interests, values, and
personality traits)
d. Behavioral segmentation in tourism (behaviors and actions, such as travel
frequency, spending habits, and travel motivations)

iii. KSA travel and tourism industry overview

a) Industry overview
Travel, Tourism, and Entertainment is a priority sector under Saudi Arabia’s Vision 2030
economic diversification initiative. The Saudi Arabian government aims to increase
domestic household spending related to entertainment and leisure activities, and to
transform the country into a major global travel destination.

b) Major players in the KSA travel and tourism industry

The major players in the KSA (Kingdom of Saudi Arabia) travel and tourism industry
reflect the country's growing efforts to diversify its economy beyond oil through its
Vision 2030 initiative. Here are some of the key companies in the sector along with their
incorporation details and insights:

a. XYZ Company - Founded in 1980, rebranded to Seera in 2019, XYZ Company is

one of the largest travel and tourism companies in the Middle East. The company
offers various services, including travel booking, hospitality, car rentals, and
corporate travel management.8
b. XYZ Company - Established in 1976, XYZ Company is a leading hospitality
company that develops, owns, and manages a broad range of hotels and
residential properties across Saudi Arabia. The company is a major player in
religious tourism, operating hotels in Makkah and Madinah, and is expanding
into leisure tourism.9
c. XYZ Company - Established in 2018 (as a subsidiary of the XYZ Company), XYZ
Company is developing the Red Sea Project, an ultra-luxury tourism destination
along the western coast of Saudi Arabia. The project focuses on sustainability
and is expected to include luxury resorts, marine experiences, and cultural
attractions.10
d. XYZ Company - Founded in 2012, XYZ Company is an online travel agency under
the XYZ Company. It is a leading digital travel platform in the Middle East,
offering booking services for flights, hotels, and holiday packages.11

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 e. XYZ Company - Established in 2007, XYZ Company is a low-cost airline that
primarily serves domestic and regional destinations. The company plays a key
role in making travel affordable for Saudi citizens and residents, as well as
tourists.

c) SWOT Analysis12
The below table includes the SWOT analysis for KSA travel and tourism industry:

Strengths Weakness
• Home to two very important • Restructuring of workforce and
holy mosques Saudization program impacts provision
• Numerous archaeological sites of qualified workforce in tourism
of historic and religious industry
significance • Underdeveloped entertainment
• Continued government efforts in industry
expansion and upgrade of current • Poor public transport infrastructure
infrastructure, facilities and • Religious seasonality impacts
services supply and demand in lodging
• Increased openness to foreign investors
Opportunities Threats
• Vision 2030 to boost attractiveness • Continued travel bans due to Covid-
of Saudi to foreign investors 19 pandemic
• Multiple mega projects supporting • Strong competition from regional peers
growth of travel sector • Continued political uncertainty in the
• Deregulation of low-cost airlines region
provides entry opportunity of
new airlines
• Huge demand for domestic / regional
air travel favors set-up of regional hub

d) Industry characteristics
a. Buyer power
Buyer power refers to the influence that customers or travel agents (buyers)
have over the company.

ABC Company KSA sells accommodations to travel agents in Saudi Arabia

through its centralized portal. Since these agents are likely to have multiple
accommodation providers to choose from (including international platforms like
Expedia or Booking.com), they have some degree of leverage.
However, ABC Company KSA can streamline the process for agents, offering
convenience, real-time availability, and potentially competitive prices, which
may reduce buyer power somewhat.

Moderate to High due to alternative platforms available for travel agents.

12 https://www.jetro.go.jp/ext_images/biz/seminar/2021/3f4e07086b6d11d0/shiryo3.pdf

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b. Supplier power
Supplier power refers to the influence suppliers have over the company,
especially in terms of pricing and availability.

The main supplier of ABC Company KSA is its parent company, ABC Company,
based in Dubai, from which it purchases hotel accommodations. Given that this is
a related-party transaction, the supplier holds significant power, especially since
it controls the availability, pricing, and terms of accommodation supply.
While this relationship creates dependency, the fact that the supplier is the
parent company suggests that strategic decisions are likely aligned, potentially
reducing some risks of supply chain volatility.

High, with the parent company (ABC Company) controlling hotel

accommodations.

c. New entrants
The threat of new entrants pertains to how easy or difficult it is for new
competitors to enter the industry.

The travel and tourism industry, especially in the digital accommodation

booking segment, has low barriers to entry in terms of setting up an online
platform. New entrants can quickly develop portals to connect buyers and
accommodation providers.
However, ABC Company KSA’s established relationship with travel agents and
the backing of its parent company (ABC Company) gives it an edge.
Centralization and strong network of accommodations may deter new players
from easily capturing market share.

Moderate threat, though brand recognition and supplier relationships provide a

buffer.

d. Degree of rivalry
This measures the intensity of competition among existing firms in the industry.

The travel and tourism industry in Saudi Arabia is becoming increasingly

competitive as the country’s Vision 2030 attracts more international and domestic
players. Competing online platforms and traditional accommodation providers
create fierce competition.
ABC Company KSA has the advantage of a niche market focus, primarily
targeting travel agents via its proprietary portal. While there is rivalry, its
business model of B2B operations may be less exposed to direct competition
compared to B2C platforms.

High due to competition in the KSA tourism market, but mitigated by ABC
Company KSA’s specific B2B focus.

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 5. Summary of Controlled Transactions

i. Introduction
This section describes in detail the Controlled Transactions. The information provided in
this section contains the transaction volumes in order to allow an assessment of their
economic significance. Moreover, it also describes the TP policy applied for each
category of the Controlled Transactions.

ii. Legal entities to the Controlled Transactions

The below table provides a brief overview of the related persons involved in the
controlled Transactions for FY 2023:

Table 4: Legal entity to the Controlled Transactions for FY2023

Name of Country Relationship

Legal
# related of tax with related Brief business description
Status
party residence party

The Company is primarily

engaged in the business of
reservation of transportation,
ABC Parent
1 Company Dubai restaurants and car rental,
Company Company
Reservation and marketing of
tourist accommodation units and
Tourism promotion activities.

Source: Information provided by the client

iii. Transaction flow and intra-group receipts/payments by tax

jurisdictions
The figure below depicts the flow of the Controlled Transactions carried out by ABC
Company.

Figure 3: Summary of related party transactions carried by ABC Company for FY2023

1 ABC Company
ABC Company

Services flow
Payment flow 1 Hotel Accommodation

Source: Information provided by the client

14 | P a g e
 The table below provides information on amounts of intra-group payments/ receipts for
each Controlled Transaction.

Table 5: Amounts of intra-group payments/receipts for the Controlled Transactions

Transaction Transaction Transaction Related Amount

Description Jurisdiction
No. Nature Type Person (SAR)
Hotel ABC United Arab
1 Purchases Services 8,545,045
Accommodation Company Emirates
Total 8,545,045

Copy of all intercompany agreement concluded by ABC Company with its related party
for the above Controlled Transaction is provided in Appendix 3.

a) Transaction 1: Hotel Accommodation

The agreement sets out the general terms and conditions between ABC Company and
ABC Company KSA as it relates to the purchase of accommodation reservations and
other travel related services from ABC Company using its online reservation system by
ABC Company.

Hotel accommodations typically include a private room with a bed, bathroom facilities,
and daily housekeeping. Basic amenities often include free Wi-Fi, a television, air
conditioning/heating, and essential furniture like a desk and wardrobe.

ABC Company will provide the ABC Company’s agents with access to the "ABC Company s
"online reservations system for booking of hotels, and other Services that may be made
available from time to time.

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6. Functional Analysis

i. General
The functional analysis provides the factual and analytical foundation for establishing a
TP methodology consistent with the arm’s length standard. It stands for organizing facts
about the related companies (with respect to specific transactions) in terms of their
functions, risks, and assets in order to identify how these characteristics are divided
between the companies involved and between the transactions under review. A
functional analysis is essential to the development of TP policies for the following
reasons:

 The functions, risks and assets associated with a related person’s operations
usually have a significant effect on its profitability; and

 The functional analysis provides the information and insight necessary to

characterize intercompany transactions and identify uncontrolled transactions
comparable to the transactions of the related persons (as well as other data).

By providing a description of the functions, risks and assets and their location within a
corporate group, the functional analysis provides the first step in evaluating the relative
contribution to profit of various related companies and the appropriate pricing of
intercompany transactions.

Based on the scope of the intercompany transactions addressed in this report, the
functional analysis includes an overview of the business functions and risks undertaken
by ABC Company and its related parties in relation to the Controlled Transactions.

ii. Functions performed

This section covers a description of the functions performed by ABC Company in relation
to the Controlled Transactions.

a) Procurement of Hotel Accommodations:

a. Vendor Relationship Management:

Vendor Relationship Management (VRM) refers to the process of building and
maintaining strong relationships with suppliers to ensure efficient procurement,
quality service, and mutually beneficial terms. It involves communication,
negotiation, and collaboration to optimize the supply chain.

ABC Company likely maintains a close relationship with its parent company in
Dubai (ABC Company) for sourcing hotel accommodations. This involves regular
communication to ensure availability, pricing, and terms are aligned with their
requirements.

b. Contract Negotiation and Terms Agreement:

Contract Negotiation and Terms Agreement is the process of discussing and
finalizing the terms of a contract between parties, including pricing, deliverables,
and conditions. It aims to ensure mutually beneficial and legally binding terms
that align with both parties' interests.

16 | P a g e
 In case of ABC Company:
 Company may be responsible for negotiating the terms of the hotel
accommodation agreements, even though it's dealing with a related
party. These terms could include pricing, volume commitments,
cancellation policies, and room allocation agreements.
 The contracts would also cover aspects like the duration of the
agreement and any special conditions during peak tourism seasons.
 While this is an intercompany transaction, the transfer pricing rules
require these transactions to be conducted at an arm’s length. The
functional analysis would need to document how these prices are
determined, ensuring they align with market rates.

c. Demand Forecasting and Planning:

Demand Forecasting and Planning is the process of predicting future customer
demand using historical data, trends, and market analysis to optimize inventory
and resource allocation. It helps businesses ensure they meet demand without
overproducing or understocking.

ABC Company would project the demand for hotel accommodations based on
anticipated tourism bookings and market trends. They would provide forecasts
to the ABC Company to secure a sufficient number of rooms. This is essential to
ensure that the ABC Company KSA can meet customer demands without
overcommitting on hotel rooms, which could result in unused inventory.

d. Order Placement and Confirmations:

Order Placement and Confirmations is the process of formally requesting goods
or services from a supplier and receiving acknowledgment of the order. It
ensures that the order details, such as quantity and delivery terms, are agreed
upon and confirmed between both parties.

Once the demand is determined, ABC Company formally places orders for hotel
accommodations with the Dubai parent company. The entity ensures that the
right quantity of hotel rooms is booked for the required periods. This involves
coordination between both entities to confirm room availability, handle special
customer requests, and guarantee a smooth booking process for the end user.

e. Pricing Review and Payment Processes:

Pricing Review and Payment Processes involve regularly assessing the cost of
goods or services to ensure competitiveness and accuracy, followed by managing
the timely settlement of payments. These steps ensure financial alignment and
compliance with agreed terms between parties.

ABC Company must periodically review the pricing of the hotel accommodations
to ensure it remains competitive, especially if tourism demand fluctuates due to
seasonal factors. The entity will also be responsible for arranging payments for
these accommodations to the parent company, ensuring that the intercompany
pricing complies with transfer pricing guidelines.

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 b) Coordination of Supply Chain Logistics:
Coordination of Supply Chain Logistics involves managing the flow of goods, services,
and information across the supply chain to ensure timely delivery and efficiency. It
includes overseeing transportation, inventory management, and communication
between suppliers and customers.

ABC Company may be involved in coordinating the logistics of ensuring that the hotel
bookings are seamlessly integrated into the larger tourism packages they sell. This
might include:
a. Ensuring that reservations are made and confirmed in a timely manner.
b. Collaborating with the parent company to solve any operational issues (e.g.,
overbooked rooms, late cancellations).

c) Monitoring Performance and Reporting:

Monitoring Performance and Reporting involves tracking the effectiveness and quality
of services or products delivered, using key performance indicators (KPIs) to assess
outcomes. This process ensures that issues are identified promptly and communicated
to relevant stakeholders for continuous improvement.

In the context of ABC Company:

a. After the accommodation services have been rendered, the ABC Company would
likely monitor the performance of ABC Company hotel accommodations in terms
of customer satisfaction and quality.
b. This involves managing feedback, resolving customer complaints, and reporting
back to the parent company about any issues that may arise, such as
overbooking or poor service quality.

iii. Risks assumed

This section covers a description of the key business risks, applicable to ABC Company in
relation to the Controlled Transactions.

a) Market Risk
Market risk refers to the risk that an entity may be unable to sell its products or services
at prices that will allow it to generate a profit or that it may be unable to sell its products
or services at all. Such risk may result from increased competition and relative pricing
pressures, declines in market demand or changes in market perceptions regarding the
entity’s products or services, and the inability to develop or penetrate in a market.

ABC Company may bear risks associated with fluctuating demand for tourism services in
KSA, and pricing pressures from competitors.

b) Inventory Risk
The risk relates to possibility of potential losses associated with carrying inventory of
raw materials (such as obsolescence, shrinkage, or market collapse).

ABC Company does not hold inventory. So, inventory risk is not applicable to their
operations.

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c) Capacity Utilization Risk
This risk relates to the possibility of non-recovery of fixed costs being incurred in course
of the business. This may happen due to circumstances such as lack of production, lack
of demand, inability to recover prices, etc.

For ABC Company, risk arises from factors like seasonal demand fluctuations, increased
competition, and external events that can lead to underutilized resources and
unrecovered fixed costs.

d) Foreign Exchange Risk

Foreign exchange risk arises from any adverse revaluation of assets and liabilities due to
fluctuation in exchange rates, which would eventually have a negative impact on the
profitability of the company.

ABC Company primarily acquires hotel accommodations from ABC Company, which
introduces foreign exchange risk.

e) Quality Risk
A company bears quality risk when there is any defect in the product/service produced,
sold or given. Further, warranty risk is the risk of repairing or re-constructing the
constructed projects for its failure to meet the contractual specifications/ standards.

In ABC Company, quality risk arises if the services provided, such as hotel
accommodations or tour experiences, fail to meet customer expectations or contractual
standards. Warranty risk may involve compensating or offering refunds for subpar
services or addressing customer complaints due to service deficiencies.

f) Credit Risk
Credit risk is the risk that a customer, having entered into a sales contract and received
services, becomes unable or unwilling to pay the purchase amount to its supplier.

In ABC Company, credit risk occurs when customers, after booking and receiving travel
services, fail to pay the agreed amount.

g) Liquidity Risk
Liquidity risk is the risk that a company or bank may be unable to meet short term
financial demands. This usually occurs due to the inability to convert a security or hard
asset to cash without a loss of capital and/ or income in the process.

Liquidity risk arises when ABC Company is unable to meet short-term financial
obligations, such as supplier payments or operational costs.

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iv. Assets employed
This section contains an overview of the main assets used by ABC Company under the
Controlled Transactions.

a) Tangible assets
The tangible assets used by ABC Company in conducting its activities consist solely of
laptops.

b) Intangible assets
ABC Company does not own or employee any significant intangible asset for its business
operation.

v. Summary of functional analysis

The following table summarizes allocation of functions, risks and assets of the parties to
the Controlled Transactions.

Table 6: Allocation of functions, risks and assets between the parties to the Controlled
Transactions in relation to ABC Company

Functions ABC Company

Procurement of Hotel Accommodations XXX
Coordination of Supply Chain Logistics XX
Monitoring Performance and Reporting X
Risks ABC Company
Market Risk XX
Inventory Risk -
Capacity Utilization Risk X
Foreign Exchange Risk XX
Quality Risk X
Credit Risk XXX
Liquidity Risk XX
Assets ABC Company
Tangible assets XXX
Intangible assets -
Key
XXX Full involvement in this function, risk or asset
XX Equal involvement in this function, risk or asset
X Low degree of Bearing limited degree of risk
- No involvement in this function, risk or asset

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7. Economic Analysis

i. Introduction
This section discusses the selection of the most appropriate TP method, based on
Chapter 4 of the KSA TP bylaws, to analyze the Controlled Transactions.

ii. Transfer pricing methods

a) Comparable Uncontrolled Price Method

The Comparable Uncontrolled Price (CUP) method is a widely recognized approach for
determining the arm's length price for transactions between related entities. This
method involves comparing the price charged in a controlled transaction (between
related parties) to the price charged in comparable uncontrolled transactions (between
unrelated parties). The key aspects of the CUP method include identifying transactions
that are similar in nature to establish a pricing benchmark and sourcing data from
reliable resources such as public databases and industry reports. Important criteria for
comparability include product or service similarity, market conditions, and the timing of
the transactions.
To ensure effective comparability, it is crucial to account for any differences that could
materially impact the open market price, or to make reasonable adjustments for those
differences. The reliability of the CUP analysis depends on the accuracy of these
adjustments, as well as the establishment of comparability. Both internal comparable
(transactions between one party to the controlled transaction and an independent
party) and external comparable (transactions between two independent parties) should
be considered when evaluating the CUP method. By focusing on these factors, the CUP
method aims to reflect true market conditions in transfer pricing.

b) Resale Price Method

The Resale Price Method (RPM) is a transfer pricing technique used to establish the
arm's length price for transactions involving the resale of goods between related
entities. This method is particularly effective when related party buys goods from
another related party and then resells them to an unrelated party. The RPM begins with
the resale price at which the product is sold to the unrelated buyer. From this price, a
gross margin is deducted, reflecting the typical profit that a distributor or reseller would
earn in a comparable uncontrolled transaction.
The calculation for the RPM can be expressed as:
Arm’s Length Price=Resale Price−Gross Margin
The gross margin is derived from comparable uncontrolled transactions involving
independent entities. For accurate comparability, it’s essential that the transactions
occur under similar market conditions and that the goods sold are comparable in nature
and function. The RPM is most commonly applied to tangible property transactions
where the purchaser has not significantly altered the goods or utilized intangible assets
before resale. Evaluating both internal and external comparable transactions is crucial
for effectively applying the RPM.

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c) Cost Plus Method
The Cost-Plus Method (CPM) is used to determine transfer prices for goods and services
exchanged in controlled transactions by comparing the markup on incurred costs with
that of comparable uncontrolled transactions. This method is particularly suited for
valuing semi-finished goods, long-term supply arrangements, and services. The cost-plus
markup is derived either from the markup on costs of the same supplier in internal
comparable transactions or from an unrelated party in external comparable
transactions. However, differences in accounting practices and the limited availability of
public information can complicate the assessment of comparability between controlled
and uncontrolled transactions.
In implementing the cost-plus method, companies first identify the cost base, which
encompasses all direct and indirect costs related to production, including raw materials,
labor, and overhead expenses. A markup is then added to this cost base to reflect a
typical profit margin expected in arm's length transactions, determined through
comparable transactions or industry standards. It’s essential for the cost-plus method to
comply with local tax regulations and international guidelines, such as those established
by the OECD. This method is most effective in scenarios where market prices are not
readily available, particularly in manufacturing and service sectors where costs can be
clearly defined.

d) Transactional Profit Split Method

The Transactional Profit Split Method (TPSM) is a transfer pricing technique to allocate
profits among related entities based on their contributions to a controlled transaction.
This method is particularly valuable for transactions involving unique intangibles or
integrated activities that are difficult to separate. TPSM operates by dividing the
combined profits derived from a controlled transaction according to the value of the
tangible and intangible assets used and the functions performed by each party involved.
The process consists of two main steps: first, determining the total profit generated from
the transaction, and then allocating that profit to each entity based on their
contributions. TPSM adheres to the arm's length principle, aiming to reflect what
independent parties would agree upon in similar circumstances. It is particularly
applicable in scenarios where there is significant interrelation between controlled and
other transactions or when parties’ own rights to intangible assets that significantly
impact profitability. In cases where it is possible to determine an arm's-length
remuneration for specific functions performed, TPSM can be applied to the residual
profit remaining after those functions are compensated.

e) Transactional Net Margin Method

The Transactional Net Margin Method (TNMM) is a transfer pricing approach that
evaluates the arm's length nature of pricing for goods, services, or intangibles in
controlled transactions. Unlike methods focusing on gross margins, TNMM compares the
net profit margin relative to a specific base—such as costs, sales, or assets—achieved in
a controlled transaction with that of comparable uncontrolled transactions. This method
measures the total return derived from the controlled taxpayer’s narrowly defined
business activity, emphasizing the importance of capital invested and risks assumed by

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 both controlled and uncontrolled parties. While comparable must be broadly similar,
some diversity in products and limited functional differences are acceptable.

To apply TNMM effectively, companies must identify reliable comparable operating

under similar economic conditions, often utilizing publicly available financial data. This
method adheres to the arm's length principle, ensuring that the financial outcomes of
controlled transactions align with those of independent parties in similar circumstances.
TNMM is particularly useful when other methods, such as the Comparable Uncontrolled
Price (CUP) method, are challenging to implement due to a lack of comparable
transactions. It is commonly applied in industries where firms have similar functions
and risks, such as manufacturing or distribution, making it a flexible and technically
sound approach for assessing transfer pricing. In contrast to the RPM and CPM, the
TNMM does not require adjustments for differences in accounting treatment of period
expenses or revenues because such differences do not affect operating profits.

f) Other Method
There may be situations where a taxpayer considers the possibilities to use any of the
transfer pricing methods recognized under Article 6 of the Bylaws and is unable to
establish an appropriate degree of comparability based on the facts and circumstances.
In such situations, the taxpayer may consider using any method, other than the above-
mentioned methods to measure the arm’s length result (e.g., use of independent
valuation reports, quotations, etc.).

iii. Selection of most appropriate method

The following paragraphs explain in detail the method applied for Controlled
Transactions 1.

Table 7: Selection of appropriate transfer pricing method for Controlled Transactions

Methodology Selection Selection criteria for Controlled Transactions

The CUP method is not applicable for ABC Company
because they exclusively provide services. Their parent
CUP Method × company supplies these services with a 1% margin on
each transaction, eliminating the need to compare
controlled and uncontrolled transactions.

The RPM method is not suitable for ABC Company

because it operates in the service sector rather than in
RPM × trading or manufacturing. Additionally, services cannot be
resold once they have been provided to the customer,
making this method impractical in this context.

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 Since ABC Company primarily provide services by
outsourcing to their parent company, the costs involved
in delivering these services can be clearly defined. The
cost- plus method allows ABC Company to calculate the
CPM ✓ transfer price by adding a markup to the costs incurred
for each service provided. This straightforward
calculation aligns well with their operational model,
where the parent company supplies services for a set
margin.

Methodology Selection Selection criteria for Controlled Transactions

Transaction involves a consistent relationship with the

parent company, using a cost-plus approach ensures that
the pricing remains transparent and justifiable. ABC
Company can easily determine the cost base for the
CPM ✓ services they receive and apply an appropriate markup to
reflect their profit margin. This method minimizes
disputes over pricing and aligns with the arm's length
principle, making it a practical choice for managing
transfer pricing in their unique service-oriented
environment.

TPSM is typically used in complex transactions involving

multiple parties where contributions to the overall profit
need to be allocated based on the functions performed. In
the case of ABC Company, the nature of their transactions
TPSM × is straightforward, as they primarily act as intermediaries
by outsourcing services to their parent company and
charging a fixed 1% margin. This lack of complexity
means there is little need to allocate profits based on
varying contributions, making TPSM unnecessary.

TNMM is not suitable for ABC Company, as it assesses the

arm's length nature of pricing by comparing net profit
margins of controlled transactions to those of comparable
uncontrolled transactions. However, ABC Company
operates mainly as an intermediary, outsourcing services
TNMM ×
to its parent. This straightforward fee structure
eliminates the complexity typically needed for a TNMM
analysis. The clear and consistent markup on outsourced
services would complicate a simple pricing model without
providing meaningful insights.

We are applying Cost Plus method for ABC Company that’s

Other ×
why there is no need for applying any Other Method.

a) Application of Cost-Plus Method

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 The Cost-Plus Method (CPM) is a transfer pricing approach where the transfer price of
goods or services is determined by adding a markup to the costs incurred in providing
those goods or services. This method involves calculating the total costs (direct and
indirect) associated with production and then applying a standard profit margin to
derive the final price.

In the case of ABC Company, which takes orders from customers in KSA and outsources
services to its parent company for a fixed 1% margin, the cost-plus method is
particularly suitable. Since ABC Company primarily provides services and has a clear
cost structure associated with these outsourced services, CPM allows for a
straightforward calculation of transfer pricing. By simply adding the 1% markup to the
costs incurred, the company can maintain transparency and consistency in pricing,
ensuring compliance with the arm's length principle. This method is effective in this
context as it minimizes disputes over pricing and aligns with the straightforward nature
of their service-oriented business model.

iv. Conclusion
Based on the above, using “Cost Plus method” was analyzed to be most appropriate
method for ABC Company. Further, a corroborative analysis was performed using Cost
Plus as the most appropriate method to conclude that the revenue earned by ABC
Company after accounting for all Transaction is at arm’s length from a KSA TP
perspective.

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Appendix 1: KSA TP Regulations
Prior to the publication of the Transfer Pricing Bylaws (“TP Bylaws”), the KSA tax law
contained no detailed TP rules or guidelines. As an Inclusive Framework member, the
KSA has agreed to the implementation of four minimum standards of the Base Erosion
and Profit Shifting (“BEPS”) project, including Action 13.
Article 63(c) of the KSA Income Tax Law allows the Zakat, Tax and Customs Authority
(“ZATCA”) to reallocate revenues and expenses associated with transactions among
related persons, as well as in the attribution of income and expenses to branches, such
that the returns reflect those that would have resulted if the parties were independent
and unrelated. This provision in the primary tax legislation provides a statutory
authority to the ZATCA to review and adjust transfer prices that it determines are not in
accordance with the arm’s-length standard.
On February 2019, ZATCA issued the TP Bylaws that are applicable to all persons
considered taxpayers pursuant to the KSA Income Tax Law (including mixed-ownership
entities). Further, ZATCA released the Transfer Pricing Guidelines (“TP Guidelines”) (the
latest edition being the third edition in November 2022) to provide detailed guidance
and minimize any ambiguities for the taxpayers on the intended implementation of TP
Bylaws. The TP Bylaws and Guidelines are broadly aligned with the international
standards, including establishing the arm’s length principle and documentation
standards as set out in the OECD Transfer Pricing Guidelines.
The TP Bylaws introduced new compliance requirements in the form of three-tier
transfer pricing documentation (i.e. master file, local file and country-by-country (“CBC”)
report) and the submission of a Controlled Transaction Disclosure Form for fiscal years
ending on or after 31 December 2019. The Controlled Transaction Disclosure Form is to
be filed as part of the annual income tax declaration within 120 days from the end of the
fiscal year end. Together with the Disclosure Form of Controlled Transactions, taxpayers
are required to submit an affidavit from a licensed auditor through which the auditor
certifies that the transfer pricing policy of the multinational enterprises (“MNE Group”)
is consistently applied by such taxpayers.
The TP bylaws require KSA entities and branches of foreign companies which are
subject to corporate Income Tax Law in KSA to maintain a transfer pricing master file
and local file, when their aggregate annual arm’s length value of the controlled
transactions exceeds SAR 6 million (“m”) in a given fiscal year. For entities not meeting
the threshold, it would be adequate to maintain documentation in any format, covering
general aspects covered in master file and local file, particularly including the
functional and economic analysis.

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The master file and local file are required to be submitted within 30 days from the date
of request from ZATCA. However, during 2019 only, taxpayers will be granted an
extension of 60 days to provide the master file and local file.
KSA taxpayers and pure-Zakat entities, having consolidated group revenue exceeding SAR
3.2b in the year immediately preceding the reporting year, will be subject to CBC
reporting requirements in KSA, and will be required to notify the ZATCA regarding the
submission of the CBC report within 120 days of the end of the reporting year and file
the CBC report within twelve months after the fiscal year end of the MNE Group.

The arm’s length principle is defined in the TP Bylaws as follows:

“Arm’s Length Principle” or “Arm’s-Length” means where conditions are made or imposed
between two or more related persons in their commercial or financial relations which
differ from those which would be made between independent persons, then any profits
which would, but for those conditions, have accrued to one of such related persons, but, by
reasons of those conditions, have not so accrued, may be included in the profits of that
person and taxed accordingly.
The selection of transfer pricing method as per the TP Bylaws is in line with OECD
Guidance and prescribed methods (comparable uncontrolled price, resale price, cost
plus, transactional net margin and transactional profit split). When, none of these
methods provide a reliable measure of the arm’s-length result, the bylaws provide that a
taxable person may use other transfer pricing methods. In addition, it is also provided
that one method will be sufficient as opposed to multiple methods being adopted. This is
a helpful concession and meets with the “purist transfer pricing” view rather than
looking at multiple methods to manage overall risk. The ZATCA may from time to time
set forth any relevant information regarding the selection of an appropriate Transfer
Pricing method in the Guidelines.
While providing the definition of “related persons” for transfer pricing purposes, the TP
Bylaws has introduced the concept of “effective control” which can be indicated by
several conditions, regardless of any common ownership of share capital between the
entities. In the second edition of KSA TP Guidelines. “Control of one Person of another
through one or more of the stated ways (i.e. Control via governance; Control via funding;
and Control via business) creates a rebuttable presumption that effective control exists.
However, other factors may be considered as well to determine whether there is
effective control. In such cases, it is up to the Taxpayer to evaluate and demonstrate that
there is in fact, no effective control.
Though the TP Bylaws does not prescribe any penalties specific to transfer pricing,
penalties prescribed under the general provisions of KSA tax law will be applied.

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Appendix 2: OECD TP Guidelines
1.1 Arm’s Length Principle
The arm’s length principle is the international transfer pricing standard that the OECD
member countries have agreed which should be used for tax purposes by multinational
enterprises and tax administrations. On January 2022, the OECD released the 2022
edition of the OECD TP Guidelines. This new version of the OECD TP Guidelines
consolidates the agreed changes to section based on various Base Erosion and Profit
Shifting (“BEPS”) recommendations. As a result, the 2022 edition includes new guidance
on the transactional profit split method, application of the approach in hard to value
intangible transactions and guidance on financial transactions, etc. Reference is made to
Article 9 of the OECD Model Tax Convention on Income and on Capital, in regards of the
arm’s length principle, which states that:
“[Where] conditions are made or imposed between two [associated] enterprises in their
commercial or financial relations which differ from those which would be made between
independent enterprises, then any profits which would, but for those conditions, have
accrued to one of the enterprises, but, by reason of those conditions, have not so
accrued, may be included in the profits of that enterprise and taxed accordingly.”13
The arm’s length standard is applied by comparing transactions between associated
parties (“controlled transactions”) with transactions between independent enterprises
(“uncontrolled transactions”) based on “economically relevant characteristics.”
Comparability is achieved if: (i) no differences between the controlled and uncontrolled
transactions exist; (ii) any differences that exist do not materially affect the condition
being examined; and (iii) to the extent differences exist, reasonably accurate
quantitative adjustments can be (and are) made to eliminate the effect of these
differences.
A number of methods for demonstrating compliance with the arm’s length standard are
presented in the OECD TP Guidelines. They may be categorized into two groups14:
► Traditional transaction methods, including Comparable Uncontrolled Price Method
(“CUP method”), Resale Price Method (“RPM”) and Cost-Plus Method (“CP method”)
► Transactional profit methods, including the Transactional Profit Split Method (“PSM”)
and Transactional Net Margin Method (“TNMM”)
The OECD TP Guidelines state that the objective is to select the method that provides
“the best estimation of an arm’s length price.”15 Notwithstanding this overall objective,
the

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OECD TP Guidelines still effectively establish a preference in which methods should be
considered. The OECD TP Guidelines state:
“Traditional transaction methods are regarded as the most direct means of establishing
whether conditions in the commercial and financial relations between associated
enterprises are arm's length.”16

As a result, where, taking account the selection criteria of the most appropriate method
for a particular case as described at paragraph 2.2, even though a traditional transaction
method and a transactional profit method can be applied in an equally reliable manner;

13 OECD TP Guidelines January 2022, paragraph 1.6

14 OECD TP Guidelines January 2022, paragraph 2.1
15 OECD TP Guidelines January 2022, paragraph 2.12
16 OECD TP Guidelines January 2022, paragraph 2.3

the traditional transaction method is preferable to the transactional profit method.

Moreover, where the CUP method and another transfer pricing method can be applied in
an equally reliable manner, the CUP method is to be preferred.17
Thus, it is acknowledged that there are situations in which the data available is
inadequate for the CUP method to be applied reliably. In such cases, it is appropriate to
apply another method; where, as outlined in the OECD TP Guidelines, one of the other
traditional transaction methods is preferable to a transactional profit method.
The process of selecting which method to apply therefore entails starting with the
preferred methods and assessing whether they can be implemented with sufficient
reliability to either support a conclusion on their own merit or with a corroborating
method or, if not, considering other acceptable methods. The following sections provide
an outline of each method.

1.2 Traditional transaction methods

As outlined, the OECD TP Guidelines discuss three traditional transaction methods: (i)
the CUP method; (ii) the RPM; and (iii) the CP method.
Comparable uncontrolled price method
The CUP method compares the price charged for property or services transferred in a
controlled transaction to the price charged for property or services transferred in a
comparable uncontrolled transaction in comparable circumstances. 18 Comparability
requires that a) none of the differences (if any) between the transactions being
compared or between the enterprises undertaking those transactions could materially
affect the price in the open market; or, b) reasonably accurate adjustments can be made
to eliminate the material effects of such differences between the controlled and
uncontrolled transactions19. The extent and reliability of the necessary quantitative
adjustments will affect the relative reliability of the analysis under the CUP method.20 As
such, the reliability of the method is therefore dependent on establishing comparability
of the transactions.
In practice, there is likely to be sufficient comparability only if the nature of the goods or
services transferred, and the circumstances in which they are transferred, are highly
similar to the controlled transaction.
The Chapter II of the 2022 OECD TP Guidelines also includes new guidance especially
applicable to commodity transactions. The new guidance states that, the CUP method
would generally be an appropriate transfer pricing method for establishing the arm’s
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length price for the transfer of commodities21 between associated enterprises22. Under
the method, the arm’s length price for commodity transactions may be determined by
reference to comparable uncontrolled transactions and by reference to comparable
uncontrolled arrangements represented by the quoted price.23 A relevant factor in
17 OECD TP Guidelines January 2022, paragraph 2.3
18 OECD TP Guidelines January 2022, paragraph 2.14
19 OECD TP Guidelines January 2022, paragraph 2.15

20 OECD TP Guidelines January 2022, paragraph 2.16

21 The “commodities” shall encompass physical products for which a quoted price is used as a reference by

independent parties in the industry to set prices in uncontrolled transactions.

22 OECD TP Guidelines January 2022, paragraph 2.18

23 The “quoted price” refers to the price of the commodity in the relevant period obtained in an international or

domestic commodity exchange market. In this context, a quoted price also includes prices obtained from recognized
and transparent price reporting or statistical agencies, or from governmental price-setting agencies, where such
in d e x e s ar e u se d a s a re f er en c e b y u n re la te d e nt it ie s t o
d e term in in g the a p p r o p r i a te n e s s o f u s i n
det e rm in e p ri c es in t ra ns ac t io ns be t w ee n t h em . based on (a)
g t h e q u o t e d p r ic e f o r a s p e c if i c c ommodity is
the extent to which the quoted price is widely and routinely used in the ordinary course
of business in the industry to negotiate prices for uncontrolled transactions comparable
to the controlled transaction (b) the pricing date, which refers to the specific time, date
or time period (e.g. a specified range of dates over which an average price is
determined) selected by the parties to determine the price for commodity
transactions.24 Further, for the CUP method to be reliably applied to commodity
transactions, the economically relevant characteristics of the controlled transaction and
the uncontrolled transactions or the uncontrolled arrangements represented by the
quoted price need to be comparable. And in cases where there are differences between
the conditions of the controlled transaction and the conditions of the uncontrolled
transactions or the conditions determining the quoted price for the commodity that
materially affect the price of the commodity transactions being examined, reasonably
accurate adjustments should be made to ensure that the economically relevant
characteristics of the transactions are comparable25.
Resale price method
Under the RPM, an arm’s length price for a sale from A to B is determined by subtracting
the resale price margin from the price at which B resells to a third party. In essence, the
resale price margin compensates a reseller of goods for costs incurred and provides an
appropriate profit for functions performed, tangible and intangible assets employed, and
risks borne by the reseller.
“The resale price margin of the reseller in the controlled transaction may be determined
by reference to the resale price margin that the same reseller earns on items purchased
and sold in comparable uncontrolled transactions (“internal comparable”). Also, the
resale price margin earned by an independent enterprise in comparable uncontrolled
transactions may serve as a guide (“external comparable”)”. Where the reseller is
carrying on a general brokerage business, the resale price margin may be related to a
brokerage fee, which is usually calculated as a percentage of the sales price of the
product sold, taking into account whether the broker is acting as an agent or a
principal.26
The RPM is generally applicable for distribution and sales transactions and is generally
not applicable for the transfer of intangible assets.
Comparability under the RPM requires that there are no differences that would
materially affect the resale price margin in the open market or that reasonably accurate
adjustments can be made to account for such differences. The extent and reliability of
adjustments will

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affect the relative reliability of the RPM analysis. Fewer adjustments are needed to
account for product differences than under the CUP method, but other comparability
attributes (e.g., functions) generally are given more weight. The RPM is not considered
to be as reliable if the reseller adds substantially to the value of the product (through
functions or intangibles) or incorporates the product into another product, because it is
difficult to ensure comparability in such circumstances.

Cost plus method

Under the CP method, an arm’s length price is determined by applying an appropriate
mark-up on costs incurred by the supplier of property or services in a controlled
24 OECD TP Guidelines January 2022, paragraph 2.22
25 OECD TP Guidelines January 2022, paragraph 2.20
tr2a6 OnEsCaDcTtiPoGnuifdoerlinpers oJapnuearrtyy2t0r2a2,npsafreagrrraepdh 2o.2r8services provided
to an associated purchaser. The underlying rationale is that a cost-plus mark-up provides an
appropriate profit for the functions performed, assets employed, and risks borne by the
taxpayer. This method is most useful where semi-finished goods are sold between
associated parties, where associated parties have concluded joint facility agreements or
long-term buy-and-supply arrangements, or where the controlled transaction is the
provision of services.27
The cost-plus mark-up of the supplier in the controlled transaction should ideally be
established by reference to the cost-plus mark-up that the same supplier earns in
comparable uncontrolled transactions (“internal comparable”). In addition, the cost-plus
mark-up that would have been earned in comparable transactions by an independent
enterprise may serve as a guide (“external comparable”).28
This method is generally not relied on in the analysis of controlled licensing transactions
as the CP method can only be applied for transactions involving tangible products and
the provision of services.
Comparability under the CP method requires that no difference exists that would
materially affect the cost-plus mark-up in the open market or that reasonably accurate
adjustments can be made to reflect any differences. The extent and reliability of
adjustments will affect the relative reliability of the analysis. Like the RPM, fewer
adjustments are needed under the CP method to account for product differences than is
the case for the CUP method, but other comparability attributes (e.g., functions)
generally are given more weight. Thus, it is particularly important to consider
differences in the level and types of expenses – operating expenses and non-operating
expenses including financing expenditures – associated with functions performed and
risks assumed by the parties or transactions being compared.29

1.3 Transactional profit methods

The OECD TP Guidelines allow the use of “other methods” when traditional transaction
methods cannot be reliably applied. Other methods outlined in the OECD TP Guidelines
include the PSM and the TNMM, which are collectively described as the transactional
profit methods.
Transactional pro𝑓it split method
The PSM determines the division of profits that independent enterprises would expect
to realize under circumstances similar to the transaction under review. The PSM
calculates the profits (either total or residual) from the controlled transaction and then
splits them

31 | P a g e
between the associated enterprises on an economically valid basis that approximates
the division of profits that would have been agreed at arm’s length. The contribution of
each entity is determined by performing a functional analysis and capability of being
measured in a reliable manner.
There are a number of approaches to the application of the PSM, depending on the
characteristics of the controlled transactions, and the information available. In
performing a profit split analysis on a residual basis, combined profits are divided in two
categories. In the first category, are profits attributable to contributions which can be
reliably benchmarked (ordinarily a market return based on the returns of independent
27 OECD TP Guidelines January 2022, paragraph 2.45
28 OECD TP Guidelines January 2022, paragraph 2.46
2 9
e n tOiEtiCeDsT)P. GIunidelsineecs oJannduaryc 2a0t2e2g, oparrya,gratphhe2. 5r1esidual profit or loss is
generated based on contributions which may be unique and valuable, and/or are
attributable to a high level of integration or the shared assumption of economically
significant risks. Stage two focuses on intangible property contributed, relative
bargaining positions, and reference to external market data.
Transactional net margin method
The TNMM examines the net profit from controlled transactions as a percentage of a
base (e.g., costs, sales, assets). Ideally, the arm’s length net margin should be established
by reference to net margins earned by the same taxpayer in comparable uncontrolled
transactions. If that is not possible, the TNMM refers to comparable transactions
between independent entities. Comparability between controlled and uncontrolled
transactions is established through a functional analysis.
Quantitative adjustments must be made to account for material differences between the
controlled and uncontrolled transactions. Use of an arm’s length range, rather than a
point estimate for an arm’s length consideration, further reduces the effect of
differences between the controlled and uncontrolled transactions.
The TNMM should consider only the profits of the controlled entity that are attributable
to the transactions under review. The application of the TNMM on a company-wide basis
is inappropriate if the company engages in a variety of different controlled transactions
that cannot be compared on an aggregate basis with those of an uncontrolled
comparable company.

1.4 Intercompany services

Chapter VII of the OECD TP Guidelines discusses issues that arise in determining for
transfer pricing purposes whether services have been provided by one member of a
multinational enterprise (“MNE”) group to other members of that group and, if so, in
establishing arm’s length pricing for those intra-group services.30

Intra-group services may vary considerably among MNE groups, and thus, each case is
dependent upon its own facts and circumstances and the arrangements within the
group.31 However, there are two main issues in the analysis of transfer pricing for
intragroup services that are addressed in the OECD TP Guidelines. The first issue is
whether services have, in fact, been provided. The second issue is determining the
appropriate charge for such services for tax purposes in accordance with the arm’s
length principle.32

32 | P a g e
Determining whether intra-group services have been rendered
The fact that a payment was made to an associated enterprise for purported services are
not prima facie evidence that such services have been rendered. At the same time, the
absence of payments or contractual agreements does not automatically lead to the
conclusion that no intra-group services have been rendered.33 The OECD TP Guidelines
state that determining whether an intra-group service has been rendered depends on
whether the activity in question provides a group member with economic or commercial
value to enhance its commercial position. This, in turn, can be determined by
considering
30 OECD TP Guidelines January 2022, paragraph 7.1
31 OECD TP Guidelines January 2022, paragraph 7.4
3 2
w h e t h er an i n d e p e n d e n t e n t e r p r i s e in7.5comparable circumstance
O E CD TP Gu i de li ne s J an u ar y 2 02 2 , p a ra g r a ph
would have been willing
33 OECD TP Guidelines January 2022, paragraph 7.18

to pay for the activity if performed for it by an independent enterprise or would have
performed the activity in-house for itself. 34 If the activity is not one for which the
independent enterprise would have been willing to pay or perform for itself, the activity
ordinarily should not be considered as an intra-group service under the arm’s length
principle. 35 The facts and circumstances of each situation will largely determine the
result. However, the OECD TP Guidelines provide an analytical framework with
reference to two circumstances. It then proceeds to address particular circumstances
and suggests examples where intra-group services do and do not exist.
The first circumstance is where the intra-group services are performed by one member
of an MNE group to meet an identified need of one or more specific group members. In
this case, an intra-group service would ordinarily be found to exist if an independent
enterprise in comparable circumstances would have satisfied the identified need either
by performing the activity in-house or by having the activity performed by a third
party36. As such, in such a case where intra-group service is found to exist, it is essential
that reliable documentation is provided to tax administrations to verify that costs have
been incurred by the service provider.37
The second circumstance is where an associated enterprise undertakes activities that
relate to more than one member of the group or to the group as a whole. In a narrow
range of such cases, where the intragroup activity may be performed relating to group
members even though those group members do not need the activity (and would not be
willing to pay for it were they independent enterprises). Such an activity would be one
that a group member (usually the parent company or a regional holding company)
performs solely because of its ownership interest in one or more other group members,
i.e., in its capacity as shareholder.38
This type of activity may be referred to as a “shareholder activity”, which would not be
considered to be an intra-group service, and thus would not justify a charge to other
group members. The costs associated with this type of activity should be borne and
allocated at the level of the shareholder.39
In contrast, if a parent company raising funds on behalf of a group member, which uses
them to acquire a new company, would be a chargeable service. Where such activities
are performed by a group company other than solely because of an ownership interest
in other group members, then that group company is not performing shareholder
activities but should be regarded as providing a service to the parent or holding
company.40
Intra-group activities that merely duplicate a service that another group member is
34 OECD TP Guidelines January 2022, paragraph 7.6
35 OECD TP Guidelines January 2022, paragraph 7.6
36 OECD TP Guidelines January 2022, paragraph 7.8
33 | P a g e
37 OECD TP Guidelines January 2022, paragraph 7.8. The OECD TP Guidelines provide as an example of repairs performed on
manufacturing equipment by a group member as a valid intra-group service.
38 OECD TP Guidelines January 2022, paragraph 7.9. The OECD TP Guidelines at 7.10 provide examples of non -chargeable

shareholder activities which include costs of activities relating to the juridical structure of the parent company, costs relating
performing for itself, or that is being performed for such other group member by a third
party are not intra-group services unless they fall under one of two exceptions. First,
where the duplication of services is only temporary.41 Second, where the duplication is
undertaken to reduce the risk of a wrong business decision.42 The nature of any possible
duplication of services and the reason the company appears to be duplicating the costs
need to be identified in detail. Examination of information provided by taxpayer may
determine the exact nature of the intra-group services (different, additional, or
complementary to the activities performed in-house).43
Activities performed by a group member that relate only to some group members but
incidentally provide benefits to other group members ordinarily would not be intra-group
services for those incidentally benefited, unless they would ordinarily be willing to pay
for the benefits.44 The same analysis applies to an enterprise that is incidentally
benefited by activities because it is part of a larger concern and not due to any specific
activity being performed.45 In contrast, activities centralized in the parent company or
one or more group service centers (such as a regional headquarters company) and made
available to the group as a whole ordinarily will be considered intra-group services
because they are the type of activities that independent enterprises would have been
willing to pay for or to perform for themselves.46
The form that the services would generally take if the transactions were between
independent parties may also be relevant in considering whether charges for the
services are appropriate. If the charge is built into the transaction, a further service fee is
not appropriate.47 A related issue is whether a fee should be charged for services
provided on an “on call” or “standby” (as incurred by an independent enterprise in
comparable circumstances) basis. The OECD TP Guidelines determine reasonable
conduct by reference to the conduct of independent parties transacting with each
other.48 The OECD TP Guidelines also refer to three factors in determining the
reasonableness of a standby charge. These factors include whether the potential need
for the service was remote, or whether the advantage of having services on-call was
negligible, or whether the on-call services could be obtained promptly and readily from
other sources without the need for stand-by arrangements. In the application of these
principles, the OECD TP Guidelines suggest looking at the benefits conferred on the
group company over a period of several years, rather than just in the year of the charge,
before determining that an intra-group service is being provided.49
41 OECD TP Guidelines January 2022, paragraph 7.11. The re-organization to centralize its management functions is
given as an example.
42 OECD TP Guidelines January 2022, paragraph 7.11. Obtaining a second legal opinion on a subject is given as an example.

43 OECD TP Guidelines January 2022, paragraph 7.11. The OECD TP Guidelines provide as an example of a company that

performs marketing services in-house and also is charged for marketing services from a group company does not of itself
determine duplication, since marketing is a broad term covering many levels of activity.
44 OECD TP Guidelines January 2022, paragraph 7.12. The OECD TP Guidelines provide as an example of an activity that is not

chargeable, a re-organization of the group, to acquire new members, or to terminate a division that provides synergistic
benefits for other group members.
45OECD TP Guidelines January 2022paragraph 7.13. The OECD TP Guidelines distinguish passive association f r o m a c t i v e
promotion that enhances the profit-making potential of particular members of the group. Thus, a higher credit3 4rating
| orPa age
marketing campaign that enhances a related company is an intra-group service.
46
OECD TP Guidelines January 2022, paragraph 7.14. The OECD TP Guidelines give numerous examples, which include order
management, customer service and call centers, many administrative services, research and development, and the
administration and protection of intangible property etc. for all or part of the group.
The fact that a payment was made to an associated enterprise for purported services can
be useful in determining whether services were in fact provided. But the mere
description of a payment as, for example, “management fees” should not be expected to
be treated as prima facie evidence that such services have been rendered. At the same
time, the absence of payments or contractual agreements does not automatically lead to
the conclusion that no intra-group services have been rendered.50

Determining an arm’s length charge

The OECD TP Guidelines permit the determination of intra-group services through the
direct-charge method and through various indirect-charge methods. The direct-charge
method is where the associated enterprises are charged for specific services. The OECD
TP Guidelines state that the direct-charge method facilitates the determination of whether
the charge is consistent with the arm’s length principle and should be easy to employ
when similar services are provided to both related and independent parties. Therefore,
its use is encouraged in those situations unless the services to third parties are merely
occasional or marginal.51
A direct charge method for charging of intragroup practices can be difficult to apply in
practice due to which group companies have developed indirect charge methods. Indirect-
charge methods are defined as cost allocation and apportionment methods, which
necessitate some degree of estimation or approximation as a basis for calculating an
arm’s length charge. These methods are generally not acceptable where specific services
that form a main business activity of the enterprise are provided not only to associated
enterprises but also to third parties. 52 The indirect method is specifically acceptable in
situations where the proportional value of the service rendered to various entities can
only be approximated or estimated, and where the separate recording and analysis of
the relevant service activities for each beneficiary would involve a disproportionately
heavy burden in relation to the activities themselves.53 The compensation for intra-
group services may also be included in the price for other transfers, such as the price for
licensing a patent included in a payment for technical assistance services or for
managerial advice on the marketing of the goods produced under the license. In such
cases, the tax administration and the taxpayers would have to check that there is no
additional service fee charged and that there is no double deduction.54
In order to satisfy the arm’s length principle, the allocation method must lead to a result
that is consistent with what comparable independent enterprises would have been
prepared to accept.55 To achieve this, the transaction should be considered from the
perspectives of the service provider and the service recipient. In this respect, the
relevant considerations include the value of the service to the recipient, and how much a
comparable independent enterprise would pay for the service in comparable
circumstances, as well as the costs to the service provider. 56 In addition, a particular
allocation basis may be acceptable or unacceptable depending on the nature and usage
of the service.57
50 OECD TP Guidelines January 2022, paragraph 7.18. 52OECD TP Guidelines
51 OECD TP Guidelines January 2022, paragraph 7.21 and 7.22. January 2022, paragraph 7.23.
53 OECD TP Guidelines January 2022, paragraph 7.24.
54 OECD TP Guidelines January 2022, paragraph 7.27. 35 | P a g e
55
OECD TP Guidelines January 2022, paragraph 7.24.
The OECD TP Guidelines refer taxpayers back to Chapters I, II and III in deciding what
method should be used to determine an arm’s length transfer price for intra-group
services. Generally, either a CUP method or a cost-based method (CP method or cost
based TNMM) will be used. The OECD TP Guidelines anticipate the use of a CUP method
where a comparable service is provided among third parties in the recipient’s market, or
where the controlled affiliate also provides similar or comparable services to third
parties under comparable circumstances. The OECD TP Guidelines anticipate the use of
the cost-based method in the circumstances where the CUP method cannot be used,
where the nature of the activities involved, assets used, and risks assumed are
comparable to those undertaken by independent parties. In exceptional cases, where it
may be difficult to apply the CUP method or the cost-based methods, it may be helpful to
take account of more than one method in reaching a satisfactory determination of arm’s
length pricing. 58
The OECD TP Guidelines suggest the use of a functional analysis of the group members
to establish a relationship between the provided service and the members’ activities and
performance. Consideration should also be given to the long-term effect of the service,
and whether the costs will ever actually produce benefits.59 Taxpayers should be able to
demonstrate the reasonableness of their charges to associated enterprises in light of
these issues if they are relevant under their particular circumstances.60
Another issue is whether the establishment of an arm’s length charge requires the
service provider to earn a profit on the transaction. While service providers generally
would seek to earn a profit, there are certain circumstances where the provider would
be willing to forgo profits to achieve some other purpose. 61 Therefore, arm’s length
charges do not always necessitate the earning of profits by the service provider.62
The OECD TP Guidelines specifically identify two potential problems in the application
of the cost-based method. First, the costs incurred by the group on the provision of the
services may need to be adjusted to make comparison of the transactions valid.63
Second, when the related entity is acting only as an agent or intermediary in the
provision of the services, the return or mark-up must be appropriate for the
performance of an agency function rather than for the performance of the services
themselves.64
Based on the OECD TP Guidelines, tax administrations and taxpayers should try to
establish the proper arm’s length pricing. However, in some cases, tax administration, in
its discretion, may be willing to forgo computing an arm’s length price from the
performance of services. This concession is unlikely to be made where the provision of a
service is a principal activity of the related enterprise, where the profit element is
relatively significant, or where direct charging is possible as a basis from which to
determine the arm’s length price.65
58 OECD TP Guidelines January 2022, paragraph 7.31.
59 OECD TP Guidelines January 2022, paragraph 7.32. This bears on the amount and timing of the charge for services.
60 OECD TP Guidelines January 2022, paragraph 7.32.

61 OECD TP Guidelines January 2022, paragraph 7.35. These are outlined under business strategies in Chapter I of the

OECD TP Guidelines.
62 OECD TP Guidelines January 2022, paragraph 7.35. Paragraph 7.36 offers an example where the services are offered
incidentally as a convenience to the group.
63
OECD TP Guidelines January 2022, paragraph 7.33.
64
OECD TP Guidelines January 2022, paragraph 7.34. 36 | P a g e
65
OECD TP Guidelines January 2022, paragraph 7.37. A cost-benefit analysis might indicate that the additional tax revenue
that would be collected does not justify the costs and administrative burdens of determining what an appropriate arm’s
length price might be in some cases. In such cases, charging all relevant costs rather than an arm’s length price may provide a
satisfactory result for MNEs and tax administrations.
The OECD TP Guidelines provides a series of examples of transfer pricing issues in the
provision of intragroup services. They are prefaced with the caution that it is necessary
to look at the actual facts and circumstances of each case before judging the applicability
of any transfer pricing method.
Low value-adding intra-group services
The OECD TP Guidelines provides a simplified approach for determining arm's length
charges for low value adding intra-group services for taxpayers, but should be applied
on a consistent, group-wide basis in all countries. The approach consists of the following
steps:

► Determination of cost pools:

Step 1: On an annual basis, calculate a pool of costs incurred by group members that
conduct low value adding intra-group services. This cost pool should exclude costs
attributable to an in-house activity benefitting solely the company conducting the
activity, including shareholder activities.
Step 2: Identify and remove from the cost pool costs relating to services performed
solely on behalf of one other group company.
► Allocation of low value-adding service costs benefitting several group members;
► Selection of the same profit mark-up to be applied on all costs in the cost pool;
► Determination of the charge for low value-adding services; and
► Application of the benefits test to low value-adding services.
The approach aims to guarantee payer countries that the system through which the
costs are allocated leads to an equal treatment for all associated enterprises that are
operating in similar circumstances. Moreover, the approach aims to guarantee that no
overpricing takes place due to general agreement on the categories of costs included in
the cost base and general agreement on the moderate mark-up of 5% that should be
charged. Finally, the transparency of the approach makes clear to payer countries
whether intermediary companies, that may have no or low functionality and may aim to
inflate the intra-group service charges, have been interposed.

Aggregation of transactions
Ideally, the arm’s length principle should be applied on a transaction-by-transaction
basis. However, in reality, separate transactions are sometimes so closely linked or
continuous that they cannot be evaluated adequately on a separate basis. 66 On the other
hand, there are also transactions that are grouped by related entities, which really need
to be evaluated separately in order to determine the arm’s length price.67 In these
circumstances, taxpayers and tax authorities should consider the economic reality of the
transaction or transactions in determining the best approach.

37 | P a g e
66 OECD TP Guidelines January 2022, paragraph 3.9. Different examples are provided in the related sub-section.
67 OECD TP Guidelines January 2022, paragraph 3.11

1.5 BEPS Actions

On 5 October 2015, the OECD released final reports on all 15 focus areas in its Action
Plan on BEPS. The OECD described the final BEPS packages as containing
recommendations that fall in several different categories as mentioned below:
► Agreed minimum standards: the recommendations on harmful tax practices (Action
5), treaty abuse (Action 6), country-by-country reporting (Action 13) and dispute
resolution (Action 14);
► Reinforced international standards: the revised OECD TP Guidelines (Actions 8-10)
and the revised OECD Model Tax Convention (including Action 7 on permanent
establishment status);
► Common approaches and best practices for domestic law: hybrid mismatch
arrangements (Action 2), controlled foreign company rules (Action 3), interest
limitations (Action 4) and disclosure of aggressive tax planning (Action 12);
► Analytical reports: tax challenges of the digital economy (Action 1), data and analysis
with respect to BEPS (Action 11) and the multilateral instrument for implementing treaty-
based recommendations (Action 15).

38 | P a g e
Appendix 3: Intercompany agreements

The list below summarizes the intercompany agreement of ABC Company currently in
place during FY2023:
 Purchases of Home Accommodation between ABC Company and ABC
Company. The above agreements shall be provided upon request.

39 | P a g e
Appendix 4: Annual Financial Statement of ABC
Company

ABC
Company FS-
2023.pdf

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