Part 1 - AL-Tax

Chapter 77.4.4 Functional density: Comparability versus uniquenessThe Administrative Principles 2005 assume that some transfer pricing fact patternswill not have comparable data to be used for the arm’s length analysis (cf. Paragraphs3.4.12.2 and 3.4.12.4). The classification into company types according to Paragraph3.4.10.2 requires an assessment as to whether the multinational’s unit (related partyor business unit) can be assessed by means of transactional comparisons.The second dimension on the company type analysis provides a measure forthe comparability of the tested party with third parties. Reciprocally, it is a measureof uniqueness. A low degree of comparability indicates a high level of intangibleassets used for the value-generation process of the business unit considered.Patents, trademarks, know-how, process, and market knowledge are examples ofsuch intangibles which affect comparability.In Figure 7.3, the functional scope is measured by means of the variable ‘comparability’and its dichotomous values, ‘yes’ and ‘no’: Regarding the arm’s lengthprinciple, a related party with a unique set of functions, risk, and assets will nothave comparable data. Such a unit is characterized by either a high level of determinablerisk resulting in a hybrid company type (Paragraph 3.4.10.2c) or coordinateduncertainty, deeming it an entrepreneur company type (Paragraph 3.4.10.2b).In contrast, if the related party can be characterized by a pattern of functions, risks,and assets which may have comparable data in the market, the arm’s length analysiscan be conducted along the mechanism ‘comparability’. A comparable unit withdeterminable risk structures is a ‘routine company’ (cf. Paragraph 3.4.10.2a), whileone dealing with coordinated uncertainty is a ‘hybrid’ (cf. Paragraph 3.4.10.2c).7.5 Arm’s length analysisThe function and risk analysis ‘in the broader sense’ provides the functional typeof the company. As indicated earlier, this is the basis of the arm’s length analysisper se. Three types of arm’s length analysis are proposed by the AdministrativePrinciples 2005: Margin analysis, planning and budget-actual analysis, and valuechain analysis with residual profit split (Paragraph 3.4.12.2).7.5.1 ‘Routine company’ and third-party comparisonIf the tested party represents a routine company type, transaction-based transferpricing methods are deemed appropriate (cf. Paragraph 3.4.10.3a). The underlyingassumption is that company units with routine profiles can be compared with third163