The question of who takes risky decisions and who bears the consequences of those decisions has always been very important in transfer pricing analysis.
Generally, if an enterprise performs a function, it bears the corresponding risk.
However, this may not always be the case in individual cases, e.g. R&D activities in contract R&D may not always be risky for the contract developer; the enterprise performs the R&D service function but does not bear the corresponding risk.
The OECD Guidelines say that if risks are allocated to the party to the controlled transaction that has relatively less control over them, the tax authority may wish to challenge the arm’s-length nature of such risk allocation
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