With the final reports of the BEPS Action Plan released in October by the OECD and the new transfer pricing documentation standard, a benchmarking analysis that is reliable and defendable is key when preparing transfer pricing documentation. For this reasons, we have compiled below key tips that in our experience will help you getting a benchmarking analysis right.
For those unfamiliar with transfer pricing, Benchmarking analysis, in a nutshell, is an economic analysis performed using a methodology (also known as transfer pricing method) to support the prices set in a transaction between international related parties.
Benchmarking analysis is the backbone of the transfer pricing documentation as they support with reliable economic data the taxpayer’s positions outlined in the transfer pricing documentation by comparing the related party transaction that is being tested with transactions entered between third parties in same or similar circumstances.
Getting it right will mean minimising the risk of a transfer pricing adjustment as the data contained in the benchmarking analysis will be the basis to defend a taxpayer’s position in front of Tax Authorities.
‘Off the self’ benchmarking analysis whereby one benchmarking is sold to various taxpayers over and over without taking into consideration the circumstances of the taxpayer will only help to tick the box from a compliance perspective. However, in substance, this approach does not follow the OECD Guidelines and arm’s length principle because it overlooks the comparability analysis between the transaction that the taxpayer is testing against third party data.
In this new BEPS environment, tailored benchmarking analysis to the taxpayers’ circumstances is our recommended approach because it appropriately addresses all of the comparability factors that as per the OECD Guidelines needs to be addressed and ultimately will provide a strong basis to defend against a Tax Authority challenge.
Transfer pricing is still considered a grey area and under the current environment with new legislation in various countries and new OECD Guidelines, there is uncertainty about the application of these new standards in a court case scenario. In audit or court case scenario, Tax Authorities/Judges may or may not agree with your benchmarking approach.
In our experience, the challenges from the tax authorities aim to tackle the decision-making process and the reasons for accepting a certain group of comparable data that ultimately alters the results. For this reasons, when performing a benchmarking analysis both the results and the process to get the results are equally relevant.
Also, an audit or a court case is likely to happen various years after the benchmarking analysis was performed and the people involved may or may not be in the organisation. Therefore, keeping records and files on the work performed is key to defend your comparable data in case of a disagreement on the results with a Tax Authority.
A Benchmarking Analysis is performed using specialized database; depending on the type of transaction you will require a specific type of database. Therefore, whether you perform the benchmarking or outsourced to a third party, it is important to ensure that the database you are using is the right one for the type of transaction you are testing. For example, for analysing intercompany loans, you will need a database that has information about credit ratings and interest rate margins whereas for transactions involving royalties you will require a database that contains license contracts.
Questions? Visit our transfer pricing benchmarking website or contact Transfer Pricing Solutions
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Thec Covid-19 pandemic has triggered the most severe recession and is causing enormous damage to the world economy. The economic downturn will impact a group’s transfer prices, analysis and documentation, more so with the BEPS Action Plans in place and the high level of transfer pricing scrutiny across the globe.
JobKeeper forms part of taxable income in the tax return. Makes sense, it is a subsidy against wages, so I am sure there are no surprises there, but how do you assess the arm’s length financial outcomes of the entity for transfer pricing purposes?
The ATO expect that Australian entities will retain the benefit of the JobKeeper payment they receive. So how do you treat the JobKeeper payments for transfer pricing purposes?