The contract terms of between assessee and its AE , help in determining risk assumed by each party and facilitates adjustments based on differences in risks that are undertaken in a controlled transaction as compared to uncontrolled transaction.
For example , captive service provider operating on cost-plus basis would have lower risk relating to receivable, marketing and credit risk which were borne by normal service provider.
FAR Analysis in Transfer Pricing – Advantages of FAR Analysis
In FAR analysis , “economically significant” functions performed, risks assumed, and assets employed should be considered (i.e. such functions, assets and risks that are likely to have an impact on cost/expenses, prices, profits arising in a transaction).
FAR analysis helps in:
- Determining the nature of functions performed by the assessee and AE(s);
- Determining true and correct characterization of the entities (Tested Party/ Others);
- Selection of most appropriate method for transfer pricing analysis; and
- Establishing comparability and undertaking economic adjustments.