Part 1 - AL-Tax

International Taxation Handbooklikelihood, uncertainty not. Uncertainty is observed – and, possibly, moderated – bythe coordination skills of the entrepreneur. Hence, the term entrepreneur refers togovernance of new, unknown, and uncertain situations. For example, the task tosearch for new business partners is full of hazards and uncertainty. If the entrepreneuris able to quantify such hazards, it becomes risk. He might insure for that or not.For example, the consequence of failed strategies is damage or even bankruptcy.Because strategies regularly show the features of innovation and novelty,they are performed under uncertainty rather than risk. The accurate level of riskcannot be determined in situations of novelty and also in instances where therewas no occurrence of damage until the present. In such a configuration, the skillsof the entrepreneur ensure that the potential for damage does not materialize or,if it does, that it does as little harm as possible.In our model on function and risk analysis for transfer pricing purposes, anentrepreneur takes into account uncertainty in all decision-making issues. Forexample, will the product and marketing strategy be successful? Will services findcustomers? Will the new manufacturing plant abroad function well? Are employeessufficiently trained and motivated? The task of the entrepreneur is to navigatearound such potential hazards of the organization. Partially, inherent uncertaintiescan be assessed ex-ante if a rule of thumb – be it industry- or individual-specific –allows this. Also, the entrepreneur might wish to cover part of that uncertainty bycontracting with an insurer (e.g. liability insurances), notwithstanding the lack ofan exact risk assessment.Theoretically, of course, the entrepreneur could safeguard against all risks anduncertainty. However, this would consume large parts of the profitability, or evenresult in losses, since the insurer would have to provide coverage for risks whichcannot be assessed or are assessed at a very high cost of underwriting. Hence,insurance coverage limits the profits of a company if the damage does not occur.It is this aspect that, among other challenges, makes transfer pricing so crucial interms of comparability of the tested party with similar third parties.In other words, transactions and the respective coordination, if performed forthe first time or very rarely, lack a consistent body of rules of thumb and experience.Transactions of strategy units developing permanent solutions to new problemsmake transfer pricing difficult in large organizations.7.3.3 Intermediary resultsFor the assessment as to whether transfer prices are at arm’s length, it is essential tounderstand the nature of functions performed and risk borne by a certain business158