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

2. Case 1 Suggested Answers / Solution (1) 1. Which factors should be taken into account in determining the arm’s length transfer price? Keywords:  Functional analysis (associated wholesaler has more functions and risks in respect of transportation)  Internal comparable (product)  Focus (attribute): comparable product  Product comparability: very important / highly required Functional comparability: less important / less required  Benchmark: (comparable uncontrolled) price  Based on the difference in contractual terms, functions and risk (transportation), a comparability adjustment needs to be made to the third party price in accordance with paragraphs 2.8 and 2.9 of the OECD TP Guidelines.

3. Case 1 Suggested Answers / Solution (2) 2. What transfer pricing method is the most appropriate to the circumstances of this case and why?  CUP method – Preferred method – Hierarchy of methods – Aim: approximation of the arm’s length price

4. Case 1 Suggested Answers / Solution (3) 3. What is the arm’s length transfer price? The arm’s length transfer price (purchase price of the associated wholesaler) can be calculated as follows: BRL Purchase price paid by independent wholesaler10.00 Comparability adjustment to account for difference in functions and risks (transportation) between associated wholesaler and independent wholesaler- 3.00 Arm’s length transfer price7.00 The example shows that the associated wholesaler and the independent wholesaler incur the same costs of goods sold (COGS) of 10 BRL (7.00 BRL purchase price plus 3.00 BRL transportation costs equals 10 BRL).

5. Case 2 Suggested Answers / Solution (1) 1. Which factors should be taken into account in determining the arm’s length transfer price? Keywords:  Functional analysis (associated wholesaler has more functions and risks in respect of transportation)  External comparable (function)  Focus (attribute): comparable function  Product comparability: less important / less required Functional comparability: very important / highly required  Benchmark: (comparable uncontrolled) gross (profit) margin  Based on the difference in contractual terms, functions and risk (transportation), a comparability adjustment needs to be made to the third party price in accordance with paragraphs 2.8 and 2.9 of the OECD TP Guidelines.

6. Case 2 Suggested Answers / Solution (2) 2. Which company should be selected as tested party and why?  The associated wholesaler (distributor) – performs less complex function (distribution) than the producer (manufacturing). – We do not know the manufacturing costs to apply the cost plus method on the producer (manufacturer).

7. Case 2 Suggested Answers / Solution (3) 3. What transfer pricing method is the most appropriate to the circumstances of this case and why?  Resale Price Method – Comparable product and comparable uncontrolled price not available; – Comparable function (distribution of wine) available – Sales price (retail price 30.00 BRL) to independent customers and purchase price (12.00 BRL) from independent supplier available – Comparable uncontrolled gross profit margin can be calculated – Aim: approximation of arm’s length price

8. Case 2 Suggested Answers / Solution (4) 4. What is the arm’s length transfer price? The resale price method is based on the gross profit margin earned by the independent wholesaler, which may be calculated as follows: BRL Retail price charged by independent wholesaler30.00100% Purchase price paid by independent wholesaler- 12.00- 40% Gross profit / margin of the independent wholesaler18.0060%

9. Case 2 Suggested Answers / Solution (5) 4. What is the arm’s length transfer price (continued)? The functions performed by the independent wholesaler are the same as those performed by the associated wholesaler. The only difference is that the associated wholesaler is responsible for arranging the transportation (assume: no pass-through costs) whereas the independent wholesaler is not. The associated wholesaler will have to receive as remuneration for the distribution function performed an amount equal to the remuneration received by the independent wholesaler, plus a mark-up to cover the transportation costs. The transportation costs are 12% of the associated wholesaler’s retail price (i.e. 3.00 BRL per bottle selling at 25.00 BRL). This means that an arm’s length gross profit margin (discount) for the associated wholesaler should be set at 72% (i.e. 60% plus 12% to cover the transportation costs).

10. Case 2 Suggested Answers / Solution (6) 4. What is the arm’s length transfer price (continued)? Using this figure (72%) as a basis, the resale price method can be used as follows to calculate the transfer price for the associated wholesaler: BRL Retail price charged by associated wholesaler25.00100% Arm’s length gross profit margin- 18.00- 72% Arm’s length transfer price (purchase price) 7.0028%  In this example, both transfer pricing methods (CUP and Resale Price Method) arrive at the same arm’s length transfer price (purchase price) of 7.00 BRL for the associated enterprises. Is this the rule or an exception?  Rather an exception - see paragraph 1.46 OECD TP Guidelines