Extract to table

The OECD Guidelines emphasize that the written contract is the starting point for the delineation analysis, but that the economic substance of the transaction, as reflected in the functions performed, assets used, and risks assumed by each party, must be consistent with the contractual terms

However, the year-end true-up must be mandatory—not discretionary—and must be enforceable by both parties

In practice, this means that if HSI's operating margin in any APA year falls outside the agreed arm's-length range, the taxpayer must make a compensating adjustment to bring the result within the range

To ensure that the quarterly transfer prices are set at levels reasonably expected to produce a full-year operating margin within the arm's-length range, the pricing process must incorporate forward-looking information regarding HSI's anticipated revenues, cost of goods sold, and operating expenses for the full fiscal year

However, the characterization must also be consistent with the risk profile implied by the delivery terms

First, the definition must be sufficiently specific to match the scope of the comparable uncontrolled transactions identified in the CUT analysis