Newsletter
CALCULATION AND ADJUST-MENT METHODS FOR COMPA-RABLE PROFIT TRANSFER PRICING
In an interpretation dated 8 June 2005, the Min-istry of Finance elaborates on the calculation and adjustment methods to be applied when the comparable profit method, as referred to in Ar-ticle 18 of the Income Tax Assessment Rules for Non-Arm's-Length Transfer Pricing, is used to assess whether a transaction meets the "arm's length" principle.
If an entity is able to obtain information on profit margins in comparable uncontrolled transactions in the same year:
1.Comparable operating profits should be calculated by taking the annual average operating assets, net sales revenue, oper-ating expenses, or other data for the tested business activity of the entity during a specific period of at least three successive years, including the year under review, and applying to them the average profit mar-gins achieved in comparable uncontrolled transactions within the same specific period, to generate an arm's-length range in ac-cordance with Article 7 Subparagraph 5 Items 1 and 2 of the Assessment Rules.
2.If the average annual operating profit of the entity from the tested business activity over the specific period falls outside the arm's-length range, then based on its oper-ating assets, net sales revenue, operating expenses, or other data for the year of the transaction under review, its operating profit should be adjusted to the median of all the comparable operating profits calcu-lated from the profit margins in comparable uncontrolled transactions in the same year.
3.But if any of the circumstances envisaged by Article 7 Subparagraph 4 Item 1 Sub items 1 to 3 and 5 applies to the enterprise, its operating profit should be adjusted to the median of all the comparable operating profits calculated from the average profit margins in comparable uncontrolled transactions throughout the specific period. However, if the outcome of the adjustment would be to reduce the entity's ROC tax burden compared with the unadjusted fig-ure, the adjustment should not be made.
If the entity is unable to obtain information on profit margins in comparable uncontrolled transactions in the same year as the transaction under review:
1.Comparable operating profits should be calculated by taking the annual average operating assets, net sales revenue, oper-ating expenses, or other data of the tested business activity of the entity over a con-tinuous period of at least three years, in-cluding the year of the transaction under review, and applying to them the average profit margins in comparable uncontrolled transactions over a continuous period of at least three years immediately preceding but not including the year of the transac-tion under review (the number of years re-ferenced should be the same as that for the tested entity), to generate an arm's-length range in accordance with Article 7 Sub-paragraph 5 Items 1 and 2 of the Assess-ment Rules.
2.If the entity's average operating profit from the tested business activity over the specific period falls outside the arm's-length range, then based on its operating assets, net sales revenue, operating expenses, or other data for the year of the transaction under review, its operating profit should be adjusted to the median of all the comparable operating profits calculated from the average profit margins in uncontrolled transactions over the continuous period of at least three years preceding the year of the transaction under review. However, if the outcome of the adjustment would be to reduce the entity's ROC tax burden compared with the unad-justed figure, the adjustment should not be made.