Uncontrolled Opinions19 Nov 2024

Country Risk Premium Adjustment in TNMM

In this episode of Uncontrolled Opinions, Mikhail and Silvana discuss the country risk premium adjustment when applying a Transactional Net Margin Method (TNMM). This discussion is particularly timely, given the recent emphasis on this adjustment in the OECD's Amount B guidance and its mandatory implementation in Brazil's transfer pricing regulations.

Key Discussion Points

OECD's Amount B Guidance

Introduction to the Data Availability Mechanism (DAM) which provides for a country risk premiums adjustment
Recognition that entities operating in higher-risk countries may warrant higher returns

Brazil's Transfer Pricing Regulations

Mandatory application of country risk adjustments when using non-Brazilian comparables in TNMM analyses
Challenges arising from Brazil's limited local dataset, necessitating broader geographic comparables

Theoretical and Practical Considerations

Debate on the appropriateness of employing country risk adjustments to limited-risk entities
Potential overlap with working capital adjustments and the need for empirical validation

Geographic Proximity vs Country Risk to Select Comparables

Exploration of selecting comparables based on similar country risk profiles rather than geographic proximity
Discussion of research by Thibaut Roques (TP Qube) and others on “Transfer pricing comparables: Preferring a close neighbor over a far-away peer?” which provides an empirical analysis on the relationship between country risk and return.

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