Documenting commodity transactions

Bits of Transfer Pricing

The commodity transactions (e.g. trade of energy, metals or agriculture products etc.) constitute an area on which the current Transfer Pricing Guidelines of the OECD include limited guidance only. Action 8-10 under the BEPS initiative however intends to fill this gap by providing a framework to taxpayers and tax administrators on the transfer pricing aspects for commodities.

The lack of guidance to date might be one of the main causes for which there have been several disputes also in Hungary between tax administrations and taxpayers operating on the commodity markets. In this regard taxpayers need to pay special attention in their transfer pricing documentation to the selection of the most appropriate method, the determination of source of comparable data and the application of any comparability adjustment.

Our experience shows that taxpayers prefer the CUP Method over any other methods when documenting their commodity transactions. However, it is important to take into consideration important characteristics when establishing comparables. This may include the physical feature and quality of the commodity as well as the contractual terms such as volumes traded, transportation, timing and terms of delivery etc.

In the absence of comparable transactions meeting the above criteria the CUP Method could be rejected and lead to the selection of other methods (e.g. Resale Price Method or TNMM) by the tax authorities. This however might be unfavorable for the taxpayers as those methods are able to take into account the unique and diversified nature of the commodity transactions to a very limited extent only.

In light of the above, taxpayers may find it relevant to review their transfer pricing policy used to document and justify the arm’s length nature of their inter-company commodity transactions to mitigate the possibility of challenges in the course of a future tax audit.