1. Organisation for Economic Co-operation and Development Transfer Pricing Seminar São Paulo, Brazil 25-27 November 2009 Case Studies on Transfer Pricing Application - Traditional Methods - Wolfgang Büttner Senior Advisor Tax Treaty and Transfer Pricing Division OECD

2. Case 1 1. Facts of the Case A wine producer in Chile sells wine to its associated Brazilian wholesaler (distributor). Under the contractual arrangement made with the associated wholesaler, delivery is f.o.b. (free on board, requiring the seller to deliver the goods on board a vessel designated by the buyer; the seller fulfils its obligations to deliver when the goods have passed over the ship's rail and the purchaser arranges for the carriage of the goods by sea and bears the transportation costs). The associated Brazilian wholesaler incurs transportation costs of 3.00 BRL per bottle.

3. Case 1 1. Facts of the Case (continued) The same producer sells the same wine to an independent Brazilian wholesaler for 10 BRL per bottle. In the contractual arrangement with the independent wholesaler, delivery is c.i.f. (cost, insurance, and freight included, i.e. the seller arranges for the carriage of the goods by sea to a port of destination and bears the transportation costs). The other circumstances are the same for the associated wholesaler and the independent wholesaler. The associated and the independent wholesaler sell the wine to independent retailers at 25.00 BRL per bottle.

4. Independent Wholesaler Brazil Associated Wholesaler Brazil Wine Producer Chile (controlled) transaction Transfer Price? (uncontrolled) transaction Sales Price 10 BRL 4 Case 1 The associated wholesaler incurs transportation costs of 3.00 BRL. The independent wholesaler incurs no transportation costs. Retailer Brazil 25 BRL Retailer Brazil

5. Case 1 2. Questions 1. Which factors should be taken into account in determining the arm’s length transfer price? 2. What transfer pricing method is the most appropriate to the circumstances of this case and why? 3. What is the arm’s length transfer price?

6. Case 2 1. Facts of the Case This case is based on the situation in case 1. In this case, however, the associated wholesaler is the Chilean’s wine producer’s exclusive distributor in Brazil. Under the contractual arrangement made with the associated wholesaler, delivery is f.o.b. The associated wholesaler incurs transportation costs of 3.00 BRL per bottle. The wine is sold to independent retailers at 25.00 BRL per bottle.

7. Case 2 1. Facts of the Case (continued) A competitor sells wine to an independent Brazilian wholesaler for 12 BRL per bottle. Delivery is c.i.f. This wine is sold to independent retailers at 30.00 BRL per bottle. The other circumstances are the same for the associated wholesaler and the independent wholesaler.

8. Independent Wholesaler Brazil Associated Wholesaler Brazil Wine Producer Chile ( controlled) transaction Transfer Price? 8 Case 2 The associated wholesaler incurs transportation costs of 3.00 BRL. The independent wholesaler incurs no transportation costs. Retailer Brazil 25 BRL Independent Wine Producer Chile (uncontrolled) transaction Sales Price 12 BRL Retailer Brazil 30 BRL

9. Case 2 2. Questions 1. Which factors should be taken into account in determining the arm’s length transfer price? 2. Which company should be selected as tested party and why? 3. What transfer pricing method is the most appropriate to the circumstances of this case and why? 4. What is the arm’s length transfer price?