Part 1 - AL-Tax

Chapter 7units are made accountable for the success or failure of the overall organization.They bear strategy risks and uncertainty involved in that business. Decision-makerswho decide the strategy of the group, or the value chain considered, are thought tobe allocated at the entrepreneurial unit. It is this unit which in transfer pricing terminologyis considered to be the residual claimant of a business process along variousfunctional steps, after having remunerated routine functions. With respect toarm’s length analysis and documentation, it is economically difficult to determinewhether the residual profit of such strategic units is at arm’s length or not. Primarily,lack of comparable variables is the reason, owing to the large impact of unique businessactivity. Hence, the arm’s length analysis is performed indirectly through a differentialbetween profit for nonentrepreneur functions and total value chain profit.7.2.3 Hybrid unitsBetween the routine type (e.g. low-risk distributor) and nonroutine type (entrepreneur,strategy unit) of company, real-world business offers various hybrid types.Considering the transfer pricing model of function and risk allocation, risk borne andassets deployed at the hybrid functional profile are more than in the routine unit, butless than in an entrepreneurial unit. For documentation purposes, such units frequentlylack comparables. Hence, internal budget planning data and actual data arenecessary to establish whether transfer prices are at arm’s length – as, for example,proposed in Paragraph 3.4.10.3b of the Administrative Principles 2005.The following classification regarding uncertainty and risk will indicate suchhybrid units. Whereas risk involved in the business operation of such units canbe assessed, the insurance premium cannot be calculated or insurance coverageis prohibitively high to be provided by the market. Hence, a company correspondingwith such a type may internalize risk.RoutineHybridNonroutineRiskdeterminable and insurableUncertaintycoordinated by the entrepreneurThird-party comparablescan be found in databasesUnique pattern of functionsperformed, risk assumed,assets deployedFigure 7.2Characterization of companies between routine and nonroutine155