From
my previous discussion, the same topic been discussed briefly in general
terms:-
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Where
the indicator considered for conditional comparability would be:-
i.
Product Feature (Characteristic/form of Services Provided)
ii.
Whether good sold at the same points in the production chain
iii.
Brand Name (Quality)
iv.
Sales Volume (Liquidity)
v.
Market Risk (Function carrying)
vi.
Timing of Sales
vii.
Mode of Transaction(Packaging, Marketing, CIF, FOB…)
viii.
Economic Situation (Different country may have different Economic conditional)
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Where TP2012 specific the concept in Para 8 & 9 in details:-
5 factors to be consider the similarity of terms and circumstances
- Characteristics of the property or services
- Functions performed, assets employed and risks assumed by the respective persons
- Contractual terms
- Economic circumstances
- Business strategies
To ease
reader expect, contain been summarized as follow:-
(1)
Characteristics of the property or services;
i.
in the case of tangible
property: the physical features, quality and the volume of supply of
property;
ii.
in the provision of services:
the nature and extent of services; and
iii.
in the case of intangible
property: the form of transaction (e.g. licensing or
sale), type of property (e.g. patent, trademark or know how), the duration and
degree of
(2)
Functions performed, assets employed and risks assumed by the
respective persons;
-
A functional analysis is a crucial process in determining
an arm‟s length price as it forms the basis for identifying comparables.
-
Tangible assets such as property, plant and equipment are usually expected to
earn long-term returns that commensurate with the business risks assumed.
-
Intangible assets are also expected to generate returns for the owners by way of
sales or licensing.
-
Evaluation of risks assumed is crucial in determining arm‟s length prices with the economic assumption that the higher the
risks assumed, the higher the expected return.
Type of Risk:-
1.
Operational risk
2.
Market risk
3.
Product risk
4.
Business risks
5.
Financial risk
6.
Credit and debt collection risks
7.
Risks of R&D failure
(3)
Contractual terms;
- The terms and conditions in a
contract may include:
(i) the form of consideration charged or paid;
(ii) sales or purchase volume;
(iii) the scope and terms of warranties provided;
(iv) rights to updates, revisions or modifications;
(v) the duration of relevant licenses, contracts or other
agreements, and termination or renegotiation rights;
(vi) collateral transactions or ongoing business relationships
between the buyer and the seller, including arrangements for the provision of
ancillary or subsidiary services; and
(vii) terms of credit and payment.
(4)
Economic circumstances
- Factors that may affect the price or
margin of a transaction include:
(i) the geographic location of the market;
(ii) the size of the market;
(iii) the extent of competition in the markets;
(iv) the level of supply and demand in the market as a
whole and in particular regions;
(v) customer purchasing power;
(vi) cost of production including the costs of land, labour
and capital, and transport costs;
(vii) the level of the market (e.g. retail or wholesale);
(viii) the date and time of transactions;
(ix) the availability of substitute goods and services; and
(x) the extent of government intervention e.g. whether
goods compared are price controlled.
(5)
Business strategies.
- In a comparability analysis, it is
necessary to evaluate whether an independent person in the same circumstances as
that of a controlled person would have adopted similar strategies and if so,
what rewards would have been expected.
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