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Form C YA 2022 - Transfer Pricing Aspects of Business Restructurings

Updated: Nov 8


Photo: Mengmeng Niu

Recent changes were made to Form C by the Inland Revenue Board in preparation for the YA 2022. One of the most critical changes is for those businesses participating in transfer pricing arrangements. As a result, the disclosure items have been significantly expanded to cover new areas.


These new areas include stating the characterisation of your company by reference to its functional profile, the business restructuring undertaken by the group during the year, and whether or not your company engages in cash pooling activities, performs any research and development activities or owns any intellectual properties.


Form C Requires Additional Disclosures

One of the primary "red flag" factors that may cause the IRB to pick a case for a transfer pricing audit is the restructuring of a business. This is especially true for business restructurings that result in a decrease in the taxpayer's overall profitability.

Business Restructurings

There is no legal term for "business restructurings," nor is there a concept that is universally acknowledged.


In the context of transfer pricing, these transactions are referred to as cross-border redeployments of:

  • functions,

  • assets (tangible and/or intangible), and

  • risks.

However, not every change in a business constitutes a "business restructuring."


Therefore, applying the definition of a business restructuring that is used in transfer pricing, most notably the definition that is included in the OECD transfer pricing guidelines, is required to determine whether or not a company restructuring has taken place.

Generally, businesses are entitled to organise their activities as they see fit.


Following the pandemic, some companies may consider restructuring to remain in business and remain competitive.


Hence, it may be normal practice for an MNE group to proceed with a business restructuring of the supply chain operations in reaction to a changing business climate, the acquisition or divestment of a business, or both.


For example, an associated enterprise may transfer the ownership of an intangible asset to its foreign principal and agree to enter into a licensing agreement with that company.


Traditional Acquisition of a Business vs Restructurings by multinational corporations (MNEs)

In this regard, company restructurings by multinational corporations (MNEs) should not be confused with the traditional acquisition of a business.

Business restructuring by multinational corporations (MNEs) that are consistent with the arm’s length principle is entirely appropriate.


However, there may be situations in which business restructurings facilitate inappropriate income shifting through non-arm’s length pricing or commercially irrational structures.


Business restructurings may include or may be motivated by outsourcing.


Outsourcing occurs between independent enterprises, for example, concerning inventory management and logistics, IT support, after-sales support, customer receivables management and R&D activities.

The underlying commercial rationale for a third party entering into an outsourcing agreement is that, generally, commercial advantages to the enterprise are expected from contracting, as compared with performing the activity by itself.


These expected commercial advantages may relate to cost reduction and/or retaining or increasing profits.


An MNE group may fragment functions across several companies to achieve efficiencies by exerting group management coordination functions.


For instance, it is common to restructure the supply chain of highly integrated MNE groups to allocate into different legal entities such as logistics, warehousing, marketing and sales.

Types of Business Restructurings

Although the list below is not exhaustive, common types of restructuring carried out by MNEs involve:

  • as concerns Manufacturing Activities, the conversion of fully-fledged manufacturers into contract or toll manufacturers (or vice versa);

  • as regards Distribution Activities, the conversion of fully-fledged distributors into limited-risk distributors, commissionaires, agents, or licenced distributors (or vice versa); and

  • as regards Intellectual Property Rights, the transfer of either trade or marketing intangibles to foreign Intellectual property holding companies.

There is a catch-all "others" option on the new Form C in addition to the specific sorts of corporate restructurings that are spelt forth in the form.


Regarding the Characterisation of Entities for the Purposes of Transfer Pricing, we have already written two articles, both of which may be found by following the link provided below.


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