Benchmarking study – courts also prioritize quality!

With each passing year, courts increasingly confirm that a properly prepared benchmarking study can be an extremely important tool, both for taxpayers and tax authorities.

Tax authorities often challenge benchmarking study by either conducting new analyses or modifying those presented by taxpayers. This frequently leads to increased tax liabilities. Therefore, having a reliable transfer pricing analysis that reflects the actual economic situation and characteristics of transactions is an important defensive tool against potential tax authority allegations regarding the non-market nature of transactions.

Transfer pricing analyses in administrative court rulings

The latest court rulings from 2023 confirm the necessity of adhering to high-quality standards in preparing benchmarking studies, given the increasing number of analyses challenged by tax authorities. In one of last year’s rulings, the court upheld the actions of the authority that questioned the comparability of the majority of observations in the sample, recognizing only one observation as comparable. Based on this, it determined the market level of remuneration and estimated income. The court also noted that the criteria for comparability adopted during the analysis should not be too general, and a better approach is generally to accept a smaller number of observations but with a high degree of comparability.

Although the proper preparation of a benchmarking study is usually crucial mainly from the taxpayer’s perspective, last year, the court also dealt with a case involving an analysis prepared by the tax authority, which it challenged due to a too limited and vague request for proposals addressed to the bank. The court in its ruling confirmed that if the analysis pertains to loan transactions, it is essential for the authority, when submitting a query to the bank, to present all relevant terms regarding the loan under examination, and these inquiries should be as specific and tailored to the transaction under scrutiny as possible.

Benchmarking is not just a formal requirement

It is important, that in the process of preparing benchmarking studies, it is not just about formally fulfilling documentation obligations. An analysis that does not meet specific standards will not be able to protect taxpayers from potential negative consequences of tax authorities challenging the market nature of transactions.

Takeaways for taxpayers

The most effective way to safeguard transfer prices against challenges to the prepared benchmarking study is to create a high-quality analysis before conducting the transaction, i.e., during its planning stage. Taking such a step will ensure that taxpayers can be confident in properly determining their settlements while maintaining the highest standards of due diligence, thereby protecting themselves against potential tax authority allegations in the future.

All assumptions adopted in the benchmarking study should be thoroughly justified. When challenging an analysis, the tax authority must demonstrate why it believes these assumptions are incorrect. Therefore, good argumentation serves as an effective defense against yielding ground to the authority in terms of sourcing comparative data. In the absence or weakness of justification for assumptions, the authority has an easier path to challenge the analysis and, consequently, modify it or prepare its own, often very unfavorable for the taxpayer.

To delve deeper into case law related to the quality of transfer pricing analyses, we encourage you to download our review, ‘Transfer Pricing in Case Law: Overview of Trends in 2023’, which premiered on April 16, 2024.

We also invite you to register for this year’s edition of MDDP on Tour breakfasts, during which we will discuss the most interesting topics, not only in the field of transfer pricing.