Nortel – Ontario Superior Court of Justice applies the proposition that the OECD transfer pricing guidelines require the assessment of risk sharing on an ex ante basis

Under Nortel's transfer pricing methodology, the entities performing R&D, including Nortel itself and a UK subsidiary, were entitled to all residual profits after payment of returns to the Nortel subsidiaries that performed sales and distribution functions.   The related agreement specified that restructuring costs incurred by each R&D subsidiary were not to be shared.

Following Nortel’s insolvency, Newbould J. rejected various submissions made by the administrators of the pension plan for the  UK subsidiary respecting transfer pricing, including that this arrangement failed to properly compensate the UK subsidiary for its restructuring costs.  He accepted the monitor’s position that "Chapter 9 of the OECD Guidelines explicitly frames the issue of restructuring costs and benefits as a question of ex ante risk allocation by way of an intercompany contract, rather than an ex post examination of who should bear the realization of a risk (i.e., restructuring costs)."  Accordingly, as this cost-bearing clause satisfied the arm’s length standard at the time of the agreement, its actual operation following an unanticipated insolvency was not a basis for overturning it.

Furthermore, the approach of the claimants’ expert that "one starts with the economic substance and then looks to see if the legal form follows the economic substance" was "the opposite of what the OECD Guidelines call for."

Neal Armstrong.  Summary of Re Nortel Networks Corp., 2014 ONSC 6973 under Treaties – Art. 9.