Commentary

B4.132 Comparable transactions and the assessment of risk

Business tax
Business tax | Commentary

B4.132 Comparable transactions and the assessment of risk

Business tax | Commentary

B4.132 Comparable transactions and the assessment of risk

Completing a functional analysis (B4.131) of transactions between associated enterprises to determine the relevant conditions and economic circumstances around those transactions would not be complete without a risk analysis. In the open market the assumption of risk by an enterprise would be expected to be compensated by an increase in return to the enterprise. The risks attaching to a transaction can be harder to identify than the functions performed or assets used and establishing which enterprise bears the risk can also be complicated. Under the 1 the process for analysing risk in a controlled transactions is summarised as follows:

  1.  

    •     identify the specific, economically significant risks

  2.  

    •     determine how these risks are contractually assumed by the associated enterprises

  3.  

    •     determine how the relevant associated enterprises operate and manage these risks especially which enterprises perform control and risk mitigation functions

  4.  

    •     determine if the contractual assumption of risk matches the with the conduct of the associated enterprises and whether the enterprise assuming risk has the necessary financial capacity and can control the risk

  5.  

    •     if the enterprise assuming the risk does not have the financial capacity and does not control

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