Transfer pricing benchmark – a key element of documentation

A comparative analysis, also referred to as a transfer pricing benchmark, is essential for:

• establishing transfer pricing in the arm’s length range, and
• fulfilling documentation requirements.

How and why to perform a transfer pricing benchmarking?

We conduct the analysis by comparing the prices charged (or the results achieved) in transactions between related parties with those involving unrelated parties. We do it based on our expertise and specialist databases to chose the most appropriate comparable companies and comparable transactions.

The benchmark serves as a tool for the taxpayer to verify whether transactions between related parties were carried out under arm’s length conditions, in line with the arm’s length principle.

The purpose of benchmarking studies in transfer pricing is to assess whether:

• related entities have applied market-based prices in their transactions,
• the prices used by related entities are acceptable to tax authorities.

Benchmark is not just a formality

Transfer pricing documentation must include a transfer pricing analysis. However, preparing a reliable, high-quality benchmark is more than a formality. It acts as a safeguard for your company against the risk of tax authorities challenging intercompany transactions as non-market-based.

The accuracy and thoroughness of this analysis often directly affect a company’s financial stability. Any inaccuracy in the benchmark can lead to:

– adjustments to the tax outcome,

– penalties for those responsible for the company’s financial matters, and

– potential disputes with tax authorities, e.g. over profit margin.

A universal benchmark? No such thing

The accuracy of the analysis depends on selecting appropriate comparable data, as not all transactions are alike. For instance, a benchmark designed for a pure distribution activity won’t apply if the transaction between related parties includes sales support services or licensing.

It’s essential to tailor the analysis to the specifics of the transaction and the entity involved. Additionally, properly documenting the preparation process is crucial to avoid the risk of the analysis being successfully challenged by tax authorities.

A well-executed benchmark serves as an insurance policy, providing peace of mind and assurance that tax authorities will not question the arm’s length nature of a transaction during a potential audit.

Transfer pricing analysis – ensuring peace of mind

A transfer pricing analysis not only ensures compliance with your documentation obligations but also provides confidence that the terms of your transactions are market-based.

With a well-prepared and carefully selected analysis, you can continuously monitor and adjust transaction terms to prevent future fiscal issues. This allows you to determine in advance whether:

• the terms of your transaction are market-based,
• you need to make changes.

Summary

A reliable comparative analysis in transfer pricing is not just a requirement; it’s an investment in your company’s tax security. It provides solid protection against potential financial and legal risks.

Need assistance with preparing a benchmark or have questions about transfer pricing or documentation? Contact our experts. We specialize in benchmarks and various types of transfer pricing analyses. With years of experience, none of our analyses have ever been successfully challenged by tax authorities.

We deliver analyses as well as transfer pricing solutions quickly and efficiently. Their quality safeguards you and your business from the negative consequences of having a transaction’s market basis questioned.