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.