Tag: Comparability analysis

A comparability analysis is a comparison of a controlled transaction with an uncontrolled transaction or transactions. Controlled and uncontrolled transactions are comparable if none of the differences between the transactions could materially affect the factor being examined in the methodology (e.g. price or margin), or if reasonably accurate adjustments can be made to eliminate the material effects of any such differences.

§ 1.482-5(e) Example 5.

Adjusting operating assets and operating profit for differences in accounts receivable. (i) USM is a U.S. company that manufactures parts for industrial equipment and sells them to its foreign parent corporation. For purposes of applying the comparable profits method, 15 uncontrolled manufacturers that are similar to USM have been identified. (ii) USM has a significantly lower level of accounts receivable than the uncontrolled manufacturers. Since the rate of return on capital employed is to be used as the profit level indicator, both operating assets and operating profits must be adjusted to account for this difference. Each uncontrolled comparable’s operating assets is reduced by the amount (relative to sales) by which they exceed USM’s accounts receivable. Each uncontrolled comparable’s operating profit is adjusted by deducting imputed interest income on the excess accounts receivable. This imputed interest income is calculated by multiplying the uncontrolled comparable’s excess accounts receivable by an interest rate appropriate for short-term debt ... Read more

§ 1.482-3(d)(3)(ii)(C) Adjustments for differences between controlled and uncontrolled transactions.

If there are material differences between the controlled and uncontrolled transactions that would affect the gross profit markup, adjustments should be made to the gross profit markup earned in the comparable uncontrolled transaction according to the provisions of § 1.482-1(d)(2). For this purpose, consideration of the operating expenses associated with the functions performed and risks assumed may be necessary, because differences in functions performed are often reflected in operating expenses. If there are differences in functions performed, however, the effect on gross profit of such differences is not necessarily equal to the differences in the amount of related operating expenses. Specific examples of the factors that may be particularly relevant to this method include – (1) The complexity of manufacturing or assembly; (2) Manufacturing, production, and process engineering; (3) Procurement, purchasing, and inventory control activities; (4) Testing functions; (5) Selling, general, and administrative expenses; (6) Foreign currency risks; and (7) Contractual terms (e.g., scope and terms of warranties provided, sales or purchase volume, credit terms, transport terms) ... Read more
Italy vs Promgas s.p.a., May 2022, Supreme Court, Cases No 15668/2022

Italy vs Promgas s.p.a., May 2022, Supreme Court, Cases No 15668/2022

Promgas s.p.a. is 50% owned by the Italian company Eni s.p.a. and 50% owned by the Russian company Gazprom Export. It deals with the purchase and sale of natural gas of Russian origin destined for the Italian market. It sells the gas to a single Italian entity not belonging to the group, Edison spa, on the basis of a contract signed on 24 January 2000. In essence, Promgas s.p.a. performes intermediary function between the Russian company, Gazprom Export (exporter of the gas), and the Italian company, Edison s.p.a. (final purchaser of the gas). Following an audit for FY 2005/06, the tax authorities – based on the Transaction Net Margin Method – held that the operating margin obtained by Promgas s.p.a. (0.23% in 2025 and 0.06% in 2006) were not in line with the results that the company could have achieved at arm’s length. Applying an operating margin of l.39% resulted in a arm’s length profit of €4,227,438.07, for the year ... Read more
Portugal vs "A S.A.", March 2022, CAAD - Administrative Tribunal, Case No : 213/2021-T

Portugal vs “A S.A.”, March 2022, CAAD – Administrative Tribunal, Case No : 213/2021-T

A S.A. is 51% owned by B SA and 49% by C Corp. A S.A is active in development of energy efficiency projects. In 2015 A S.A took out loans from B and C at an annual interest rate of 3.22xEuribor 12 months, plus a spread of 14%. A S.A had also paid for services to related party D. The tax authorities issued an assessment related to the interest rate on the loan and the service purportedly received and paid for. A complaint was filed by A S.A. with the Administrative Tribunal (CAAD). Judgement of the CAAD The complaint of A S.A was dismissed and the assessment upheld. Excerpts regarding the interest rate “Now, regarding the first argument, it falls immediately by the base, since the Applicant has not proved that it had made any effort to finance itself with the bank and that this effort was unsuccessful. On the contrary, it seems to result from the request for arbitration ... Read more

TPG2022 Chapter X paragraph 10.65

Information is readily available in many lending markets on the different rates of interest charged for differently rated enterprises and such information may usefully contribute to performing comparability analyses. Financing transactions that the borrowing MNE or another MNE within the group has with external lenders may also be reliable comparables for interest rates charged by associated enterprises (see paragraphs 10.94 and 10.95). Financing transactions undertaken by the borrowing MNE or another entity in the MNE group, for example the MNE group parent, will be reliable comparables only where the differences between the controlled and uncontrolled transactions do not materially affect the interest rate or reasonably accurate adjustments can be made ... Read more

TPG2022 Chapter X paragraph 10.20

In an ideal scenario, a comparability analysis would enable the identification of financial transactions between independent parties which match the tested transaction in all respects. With the many variables involved, it is more likely that potential comparables will differ from the tested transaction. Where differences exist between the tested transaction and any proposed comparable, it will be necessary to consider whether such differences will have a material impact on the price. If so, it may be possible, where appropriate, to make comparability adjustments to improve the reliability of a comparable. This is more likely to be achievable where the adjustment is based on a quantitative factor and there is good quality data easily available (e.g. on currency differences) than, for instance, in trying to compare loans to borrowers with qualitative differences or where data is not so readily available (e.g. borrowers with different business strategies) ... Read more

TPG2022 Chapter VI paragraph 6.117

Set out below is a description of some of the specific features of intangibles that may prove important in a comparability analysis involving transfers of intangibles or rights in intangibles. The following list is not exhaustive and in a specific case consideration of additional or different factors may be an essential part of a comparability analysis ... Read more

TPG2022 Chapter VI paragraph 6.111

In applying the principles of the Guidelines related to the content and process of a comparability analysis to a transaction involving intangibles, a transfer pricing analysis must consider the options realistically available to each of the parties to the transaction ... Read more

TPG2022 Chapter VI paragraph 6.107

After identifying the relevant transactions involving intangibles, specifically identifying the intangibles involved in those transactions, identifying which entity or entities legally own the intangibles as well as those that contribute to the value of the intangibles, it should be possible to identify arm’s length conditions for the relevant transactions. The principles set out in Chapters I – III of these Guidelines should be applied in determining arm’s length conditions for transactions involving intangibles. In particular, the recommended nine-step process set out in paragraph 3.4 can be helpful in identifying arm’s length conditions for transactions involving intangibles. As an essential part of applying the principles of Chapter III to conduct a comparability analysis under the process described in paragraph 3.4, the principles contained in Sections A, B, and C of this Chapter VI should be considered ... Read more

TPG2022 Chapter VI paragraph 6.4

In order to determine arm’s length conditions for the use or transfer of intangibles it is important to perform a functional and comparability analysis in accordance with Section D. 1 of Chapter I, based on identifying the intangibles and associated risks in contractual arrangements and then supplementing the analysis through examination of the actual conduct of the parties based on the functions performed, assets used, and risks assumed, including control of important functions and economically significant risks. Accordingly the next section, Section A, provides guidance on identifying intangibles. Section B examines legal ownership and other contractual terms, together with guidance on the evaluation of the conduct of the parties based on functions, assets and risks. Section C outlines some typical scenarios involving intangibles, and Section D provides guidance on determining arm’s length conditions including the application of pricing methods and valuation techniques, and provides an approach to determining arm’s length conditions for a specific category of hard-to-value intangibles. Examples illustrating ... Read more

TPG2022 Chapter III paragraph 3.83

Small to medium sized enterprises are entering into the area of transfer pricing and the number of cross-border transactions is ever increasing. Although the arm’s length principle applies equally to small and medium sized enterprises and transactions, pragmatic solutions may be appropriate in order to make it possible to find a reasonable response to each transfer pricing case ... Read more

TPG2022 Chapter III paragraph 3.82

It is a good practice for taxpayers to set up a process to establish, monitor and review their transfer prices, taking into account the size of the transactions, their complexity, level of risk involved, and whether they are performed in a stable or changing environment. Such a practical approach would conform to a pragmatic risk assessment strategy or prudent business management principle. In practice, this means that it may be reasonable for a taxpayer to devote relatively less effort to finding information on comparables supporting less significant or less material controlled transactions. For simple transactions that are carried out in a stable environment and the characteristics of which remain the same or similar, a detailed comparability (including functional) analysis may not be needed every year ... Read more

TPG2022 Chapter III paragraph 3.81

When undertaking a comparability analysis, there is no requirement for an exhaustive search of all possible relevant sources of information. Taxpayers and tax administrations should exercise judgment to determine whether particular comparables are reliable ... Read more

TPG2022 Chapter III paragraph 3.80

One question that arises when putting the need for comparability analyses into perspective is the extent of the burden and costs that should be borne by a taxpayer to identify possible comparables and obtain detailed information thereon. It is recognised that the cost of information can be a real concern, especially for small to medium sized operations, but also for those MNEs that deal with a very large number of controlled transactions in many countries. Paragraph 4.28 and Chapter V contain explicit recognition of the need for a reasonable application of the requirement to document comparability ... Read more

TPG2022 Chapter III paragraph 3.79

The use of multiple year data does not necessarily imply the use of multiple year averages. Multiple year data and averages can however be used in some circumstances to improve reliability of the range. See paragraphs 3.57-3.62 for a discussion of statistical tools ... Read more

TPG2022 Chapter III paragraph 3.78

Multiple year data can also improve the process of selecting third party comparables e.g. by identifying results that may indicate a significant variance from the underlying comparability characteristics of the controlled transaction being reviewed, in some cases leading to the rejection of the comparable, or to detect anomalies in third party information ... Read more

TPG2022 Chapter III paragraph 3.77

Multiple year data will also be useful in providing information about the relevant business and product life cycles of the comparables. Differences in business or product life cycles may have a material effect on transfer pricing conditions that needs to be assessed in determining comparability. The data from earlier years may show whether the independent enterprise engaged in a comparable transaction was affected by comparable economic conditions in a comparable manner, or whether different conditions in an earlier year materially affected its price or profit so that it should not be used as a comparable ... Read more

TPG2022 Chapter III paragraph 3.76

In order to obtain a complete understanding of the facts and circumstances surrounding the controlled transaction, it generally might be useful to examine data from both the year under examination and prior years. The analysis of such information might disclose facts that may have influenced (or should have influenced) the determination of the transfer price. For example, the use of data from past years will show whether a taxpayer’s reported loss on a transaction is part of a history of losses on similar transactions, the result of particular economic conditions in a prior year that increased costs in the subsequent year, or a reflection of the fact that a product is at the end of its life cycle. Such an analysis may be particularly useful where a transactional profit method is applied. See paragraph 1.151 on the usefulness of multiple year data in examining loss situations. Multiple year data can also improve the understanding of long term arrangements ... Read more

TPG2022 Chapter III paragraph 3.75

In practice, examining multiple year data is often useful in a comparability analysis, but it is not a systematic requirement. Multiple year data should be used where they add value to the transfer pricing analysis. It would not be appropriate to set prescriptive guidance as to the number of years to be covered by multiple year analyses ... Read more

TPG2022 Chapter III paragraph 3.74

Data from years following the year of the transaction may also be relevant to the analysis of transfer prices, but care must be taken to avoid the use of hindsight. For example, data from later years may be useful in comparing product life cycles of controlled and uncontrolled transactions for the purpose of determining whether the uncontrolled transaction is an appropriate comparable to use in applying a particular method. The conduct of the parties in years following the transaction will also be relevant in accurately delineating the actual transaction ... Read more

TPG2022 Chapter III paragraph 3.73

The reasoning that is found at paragraphs 6.181-6.185, which provide guidance on the arm’s length pricing of transactions involving intangibles for which valuation is highly uncertain at the time of the transactions, applies by analogy to other types of transactions with valuation uncertainties. The main question is to determine whether the valuation was sufficiently uncertain at the outset that the parties at arm’s length would have required a price adjustment mechanism, or whether the change in value was so fundamental a development that it would have led to a renegotiation of the transaction. Where this is the case, the tax administration would be justified in determining the arm’s length price for the transaction on the basis of the adjustment clause or re-negotiation that would be provided at arm’s length in a comparable uncontrolled transaction. In other circumstances, where there is no reason to consider that the valuation was sufficiently uncertain at the outset that the parties would have required a ... Read more

TPG2022 Chapter III paragraph 3.72

The question arises whether and if so how to take account in the transfer pricing analysis of future events that were unpredictable at the time of the testing of a controlled transaction, in particular where valuation at that time was highly uncertain. The question should be resolved, both by taxpayers and tax administrations, by reference to what independent enterprises would have done in comparable circumstances to take account of the valuation uncertainty in the pricing of the transaction ... Read more

TPG2022 Chapter III paragraph 3.71

Both the arm’s length price-setting and the arm’s length outcome-testing approaches, as well as combinations of these two approaches, are found among OECD member countries. The issue of double taxation may arise where a controlled transaction takes place between two associated enterprises where different approaches have been applied and lead to different outcomes, for instance because of a discrepancy between market expectations taken into account in the arm’s length price-setting approach and actual outcomes observed in the arm’s length outcome-testing approach. See paragraphs 4.38 and 4.39. Competent authorities are encouraged to use their best efforts to resolve any double taxation issues that may arise from different country approaches to year-end adjustments and that may be submitted to them under a mutual agreement procedure (Article 25 of the OECD Model Tax Convention) ... Read more

TPG2022 Chapter III paragraph 3.70

In other instances, taxpayers might test the actual outcome of their controlled transactions to demonstrate that the conditions of these transactions were consistent with the arm’s length principle, i.e. on an ex post basis (hereinafter “the arm’s length outcome-testing” approach). Such test typically takes place as part of the process for establishing the tax return at year-end ... Read more

TPG2022 Chapter III paragraph 3.69

In some cases, taxpayers establish transfer pricing documentation to demonstrate that they have made reasonable efforts to comply with the arm’s length principle at the time their intra-group transactions were undertaken, i.e. on an ex ante basis (hereinafter “the arm’s length price-setting” approach), based on information that was reasonably available to them at that point. Such information includes not only information on comparable transactions from previous years, but also information on economic and market changes that may have occurred between those previous years and the year of the controlled transaction. In effect, independent parties in comparable circumstances would not base their pricing decision on historical data alone ... Read more

TPG2022 Chapter III paragraph 3.68

In principle, information relating to the conditions of comparable uncontrolled transactions undertaken or carried out during the same period of time as the controlled transaction (“contemporaneous uncontrolled transactions”) is expected to be the most reliable information to use in a comparability analysis, because it reflects how independent parties have behaved in an economic environment that is the same as the economic environment of the taxpayer’s controlled transaction. Availability of information on contemporaneous uncontrolled transactions may however be limited in practice, depending on the timing of collection ... Read more

TPG2022 Chapter III paragraph 3.67

There are timing issues in comparability with respect to the time of origin, collection and production of information on comparability factors and comparable uncontrolled transactions that are used in a comparability analysis. See paragraphs 5.27 and 5.36 of Chapter V for indications with respect to timing issues in the context of transfer pricing documentation requirements ... Read more

TPG2022 Chapter III paragraph 3.66

A similar investigation should be undertaken for potential comparables returning abnormally large profits relative to other potential comparables ... Read more

TPG2022 Chapter III paragraph 3.65

Generally speaking, a loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be a comparable. Circumstances in which loss-making transactions/ enterprises should be excluded from the list of comparables include cases where losses do not reflect normal business conditions, and where the losses incurred by third parties reflect a level of risks that is not comparable to the one assumed by the taxpayer in its controlled transactions. Loss-making comparables that satisfy the comparability analysis should not however be rejected on the sole basis that they suffer losses ... Read more

TPG2022 Chapter III paragraph 3.64

An independent enterprise would not continue loss-generating activities unless it had reasonable expectations of future profits. See paragraphs 1.149-1.151. Simple or low risk functions in particular are not expected to generate losses for a long period of time. This does not mean however that loss-making transactions can never be comparable. In general, all relevant information should be used and there should not be any overriding rule on the inclusion or exclusion of loss-making comparables. Indeed, it is the facts and circumstances surrounding the company in question that should determine its status as a comparable, not its financial result ... Read more

TPG2022 Chapter III paragraph 3.63

Extreme results might consist of losses or unusually high profits. Extreme results can affect the financial indicators that are looked at in the chosen method (e.g. the gross margin when applying a resale price, or a net profit indicator when applying a transactional net margin method). They can also affect other items, e.g. exceptional items which are below the line but nonetheless may reflect exceptional circumstances. Where one or more of the potential comparables have extreme results, further examination would be needed to understand the reasons for such extreme results. The reason might be a defect in comparability, or exceptional conditions met by an otherwise comparable third party. An extreme result may be excluded on the basis that a previously overlooked significant comparability defect has been brought to light, not on the sole basis that the results arising from the proposed “comparable” merely appear to be very different from the results observed in other proposed “comparables” ... Read more

TPG2022 Chapter III paragraph 3.62

In determining this point, where the range comprises results of relatively equal and high reliability, it could be argued that any point in the range satisfies the arm’s length principle. Where comparability defects remain as discussed at paragraph 3.57, it may be appropriate to use measures of central tendency to determine this point (for instance the median, the mean or weighted averages, etc., depending on the specific characteristics of the data set), in order to minimise the risk of error due to unknown or unquantifiable remaining comparability defects ... Read more

TPG2022 Chapter III paragraph 3.61

If the relevant condition of the controlled transaction (e.g. price or margin) falls outside the arm’s length range asserted by the tax administration, the taxpayer should have the opportunity to present arguments that the conditions of the controlled transaction satisfy the arm’s length principle, and that the result falls within the arm’s length range (i.e. that the arm’s length range is different from the one asserted by the tax administration). If the taxpayer is unable to establish this fact, the tax administration must determine the point within the arm’s length range to which it will adjust the condition of the controlled transaction ... Read more

TPG2022 Chapter III paragraph 3.60

If the relevant condition of the controlled transaction (e.g. price or margin) is within the arm’s length range, no adjustment should be made ... Read more

TPG2022 Chapter III paragraph 3.59

Where the application of the most appropriate method (or, in relevant circumstances, of more than one method, see paragraph 2.12), produces a range of figures, a substantial deviation among points in that range may indicate that the data used in establishing some of the points may not be as reliable as the data used to establish the other points in the range or that the deviation may result from features of the comparable data that require adjustments. In such cases, further analysis of those points may be necessary to evaluate their suitability for inclusion in any arm’s length range ... Read more

TPG2022 Chapter III paragraph 3.58

A range of figures may also result when more than one method is applied to evaluate a controlled transaction. For example, two methods that attain similar degrees of comparability may be used to evaluate the arm’s length character of a controlled transaction. Each method may produce an outcome or a range of outcomes that differs from the other because of differences in the nature of the methods and the data, relevant to the application of a particular method, used. Nevertheless, each separate range potentially could be used to define an acceptable range of arm’s length figures. Data from these ranges could be useful for purposes of more accurately defining the arm’s length range, for example when the ranges overlap, or for reconsidering the accuracy of the methods used when the ranges do not overlap. No general rule may be stated with respect to the use of ranges derived from the application of multiple methods because the conclusions to be drawn ... Read more

TPG2022 Chapter III paragraph 3.57

It may also be the case that, while every effort has been made to exclude points that have a lesser degree of comparability, what is arrived at is a range of figures for which it is considered, given the process used for selecting comparables and limitations in information available on comparables, that some comparability defects remain that cannot be identified and/or quantified, and are therefore not adjusted. In such cases, if the range includes a sizeable number of observations, statistical tools that take account of central tendency to narrow the range (e.g. the interquartile range or other percentiles) might help to enhance the reliability of the analysis ... Read more

TPG2022 Chapter III paragraph 3.56

In some cases, not all comparable transactions examined will have a relatively equal degree of comparability. Where it is possible to determine that some uncontrolled transactions have a lesser degree of comparability than others, they should be eliminated ... Read more

TPG2022 Chapter III paragraph 3.55

In some cases it will be possible to apply the arm’s length principle to arrive at a single figure (e.g. price or margin) that is the most reliable to establish whether the conditions of a transaction are arm’s length. However, because transfer pricing is not an exact science, there will also be many occasions when the application of the most appropriate method or methods produces a range of figures all of which are relatively equally reliable. In these cases, differences in the figures that comprise the range may be caused by the fact that in general the application of the arm’s length principle only produces an approximation of conditions that would have been established between independent enterprises. It is also possible that the different points in a range represent the fact that independent enterprises engaged in comparable transactions under comparable circumstances may not establish exactly the same price for the transaction ... Read more

TPG2022 Chapter III paragraph 3.54

Ensuring the needed level of transparency of comparability adjustments may depend upon the availability of an explanation of any adjustments performed, the reasons for the adjustments being considered appropriate, how they were calculated, how they changed the results for each comparable and how the adjustment improves comparability. Issues regarding documentation of comparability adjustments are discussed in Chapter V ... Read more

TPG2022 Chapter III paragraph 3.53

It is not appropriate to view some comparability adjustments, such as for differences in levels of working capital, as “routine” and uncontroversial, and to view certain other adjustments, such as for country risk, as more subjective and therefore subject to additional requirements of proof and reliability. The only adjustments that should be made are those that are expected to improve comparability ... Read more

TPG2022 Chapter III paragraph 3.52

It is not always the case that adjustments are warranted. For instance, an adjustment for differences in accounts receivable may not be particularly useful if major differences in accounting standards were also present that could not be resolved. Likewise, sophisticated adjustments are sometimes applied to create the false impression that the outcome of the comparables search is “scientific”, reliable and accurate ... Read more

TPG2022 Chapter III paragraph 3.51

It bears emphasis that comparability adjustments are only appropriate for differences that will have a material effect on the comparison. Some differences will invariably exist between the taxpayer’s controlled transactions and the third party comparables. A comparison may be appropriate despite an unadjusted difference, provided that the difference does not have a material effect on the reliability of the comparison. On the other hand, the need to perform numerous or substantial adjustments to key comparability factors may indicate that the third party transactions are in fact not sufficiently comparable ... Read more

TPG2022 Chapter III paragraph 3.50

Comparability adjustments should be considered if (and only if) they are expected to increase the reliability of the results. Relevant considerations in this regard include the materiality of the difference for which an adjustment is being considered, the quality of the data subject to adjustment, the purpose of the adjustment and the reliability of the approach used to make the adjustment ... Read more

TPG2022 Chapter III paragraph 3.49

An example of a working capital adjustment designed to reflect differing levels of accounts receivable, accounts payable and inventory is provided in the Annex to Chapter III. The fact that such adjustments are found in practice does not mean that they should be performed on a routine or mandatory basis. Rather, the improvement to comparability should be shown when proposing these types of adjustments (as for any type of adjustment). Further, a significantly different level of relative working capital between the controlled and uncontrolled parties may result in further investigation of the comparability characteristics of the potential comparable ... Read more

TPG2022 Chapter III paragraph 3.48

Examples of comparability adjustments include adjustments for accounting consistency designed to eliminate differences that may arise from differing accounting practices between the controlled and uncontrolled transactions; segmentation of financial data to eliminate significant non- comparable transactions; adjustments for differences in capital, functions, assets, risks ... Read more

TPG2022 Chapter III paragraph 3.47

The need to adjust comparables and the requirement for accuracy and reliability are pointed out in these Guidelines on several occasions, both for the general application of the arm’s length principle and more specifically in the context of each method. To be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology or that reasonably accurate adjustments can be made to eliminate the effect of any such differences. Whether comparability adjustments should be performed (and if so, what adjustments should be performed) in a particular case is a matter of judgment that should be evaluated in light of the discussion of costs and compliance burden at Section C ... Read more

TPG2022 Chapter III paragraph 3.46

The process followed to identify potential comparables is one of the most critical aspects of the comparability analysis and it should be transparent, systematic and verifiable. In particular, the choice of selection criteria has a significant influence on the outcome of the analysis and should reflect the most meaningful economic characteristics of the transactions compared. Complete elimination of subjective judgments from the selection of comparables would not be feasible, but much can be done to increase objectivity and ensure transparency in the application of subjective judgments. Ensuring transparency of the process may depend on the extent to which the criteria used to select potential comparables are able to be disclosed and the reasons for excluding some of the potential comparables are able to be explained. Increasing objectivity and ensuring transparency of the process may also depend on the extent to which the person reviewing the process (whether taxpayer or tax administration) has access to information regarding the process followed and ... Read more

TPG2022 Chapter III paragraph 3.45

It would not be appropriate to give systematic preference to one approach over the other because, depending on the circumstances of the case, there could be value in either the “additive” or the “deductive” approach, or in a combination of both. The “additive” and “deductive” approaches are often not used exclusively. In a typical “deductive” approach, in addition to searching public databases it is common to include third parties, for instance known competitors (or third parties that are known to carry out transactions potentially comparable to those of the taxpayer), which may otherwise not be found following a purely deductive approach, e.g. because they are classified under a different industry code. In such cases, the “additive” approach operates as a tool to refine a search that is based on a “deductive” approach ... Read more

TPG2022 Chapter III paragraph 3.44

One advantage of the “deductive” approach is that it is more reproducible and transparent than the “additive”. It is also easier to verify because the review concentrates on the process and on the relevance of the selection criteria retained. On the other hand, it is acknowledged that the quality of the outcome of a “deductive” approach depends on the quality of the search tools on which it relies (e.g. quality of the database where a database is used and possibility to obtain detailed enough information). This can be a practical limitation in some countries where the reliability and usefulness of databases in comparability analyses are questionable ... Read more