draining development.pdf - Khazar University

242 Draining Development?from which to extract a market price necessitates approximations fromeither a range of similar transactions (adjusted for key comparability differences)or the use of valuation techniques that fundamentally rely onsubjective assessments of economic contributions and company-specificfinancial forecasts. In such cases, the transfer pricing analysis tends togenerate a range of prices, and any point within that range may be consideredan arm’s-length price.Transfer pricing is not an exact science, and the OECD guidelinesexplicitly state as follows:There will be many occasions when the application of the most appropriatemethod or methods produces a range of figures all of which are relativelyequally reliable. In these cases, differences in the figures that makeup the range may stem from the fact that in general the application of thearm’s-length principle only produces an approximation of conditionsthat would have been established between independent enterprises.(OECD 1995, I-19)Furthermore, the OECD guidelines specify the following:A range of figures may also result when more than one method is appliedto evaluate a controlled transaction. For example, two methods that attainsimilar degrees of comparability may be used to evaluate the arm’s-lengthcharacter of a controlled transaction. Each method may produce an outcomeor a range of outcomes that differs from the other because of differencesin the nature of the methods and the data, relevant to the applicationof a particular method, used. Nevertheless, each separate rangepotentially could be used to define an acceptable range of arm’s-lengthfigures. (OECD 1995, I-19)To guide the process of selecting appropriate comparable transactions,transfer pricing reports include extensive functional analyses of acompany’s assets employed, functions undertaken, and risks borne. 8Even if the product transacted is a commodity for which market pricesare widely available, differences in circumstances and timing issues likelynecessitate comparability adjustments. Consider, for example, a hypotheticalmultinational oil company selling a cargo of oil from Cabinda,Angola. Starting with the published price of Brent crude, you need toadjust (at least) for differences in chemical characteristics between thetwo types of crude and for transportation costs. 9 As the type of product