Aggregation of Transactions

Aggregation of Transactions – “When to” & “When not to”

Aggregation of transactions during benchmarking analysis has seen wide adoption without appreciating the nuances of transactional analysis. Though various country regulations and OECD guidelines lay down various criteria to determine if the transactions are so closely linked to warrant aggregation, one should not consider commencing TP pricing/benchmarking with this as a default approach.

In this post, we highlight certain instances wherein a Transactional Analysis approach should be adopted as against the aggregation approach.

• Setting up of Pricing PolicyIn case when a TP policy is to be established for various new transactions, the FAR analysis should be carried out for every distinctive activity/service/ transaction that it proposes to undertake with related parties (RPs). Every transaction needs to be clearly delineated since the FAR qua the transaction vary, and the return which an entity is expected to earn is correlated to its key value adding activities / risks. Thus, determining the arm’s length margin to be earned by an entity at net level by aggregating all transactions may not be appropriate. This is more relevant for jurisdictions which have recently commenced TP regime in their tax law (e.g UAE). Transaction level analysis is critical for price setting for the first year, for such cases.
• Payment of royaltiesPayment for intangibles has always been a litigated area and hence the arm’s length price for such IP transactions (right to use/ transfer of IP) is to be built on a robust DEMPE analysis considering the IP arrangement between the RPs & their relative contributions to the Intangibles. Aggregation of these transactions under TNMM are finding less favour with the Tax authorities and adoption of standalone testing using CUP method is required, though taxpayers contest that these are inextricably linked to the major activity.
• Payments to Key Managerial Personnel (KMP)Countries such as UAE, Qatar cover payment to KMP as a related party transaction. Generally, taxpayers aggregate KMP payments with other transactions to substantiate arm’s length pricing. This however is not a fool proof approach. For Ex., where an entity incurs losses, question arises if there will be no payment allowed to KMP. This transaction should be evaluated on a standalone basis, & the price should be arrived at having regard to roles & responsibilities of KMP, proof that services were rendered, need benefit test analysis etc.
• Financial TransactionsFinancial transactions cannot be clubbed with other transactions & will have to be tested on a standalone basis by evaluating various terms & conditions of underlying loan, credit rating of borrower, currency of loan and other factors.

Hence, one should consider evaluating the facts / specificity and all the parameters before deciding aggregation approach.