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Database of Transfer Pricing Case Laws

TPG2022 Chapter III paragraph 3.46

Posted on January 20, 2022 | By OECD

Category: OECD Transfer Pricing Guidelines (2022), TPG2022 Chapter III: Comparability Analysis | Tag: Benchmark study, Comparability analysis, Comparables search, Quantitative and qualitative criteria, Search criteria, Transparent systematic and verifiable

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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 to the same sources of data. Issues of documentation of the process of identifying comparables are discussed in Chapter V.

Related Guidelines

TPG2022 Chapter III paragraph 3.43In practice, both quantitative and qualitative criteria are used to include or reject potential comparables. Examples of qualitative criteria are found in product portfolios and business strategies. The most commonly observed quantitative criteria are: Size criteria in terms of Sales, Assets or Number of Employees. The size of the transaction...

TPG2022 Chapter III paragraph 3.47The 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...

TPG2022 Chapter III paragraph 3.45It 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...

TPG2022 Chapter III paragraph 3.44One 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...

TPG2022 Chapter III paragraph 3.42The second possibility, the “deductive” approach, starts with a wide set of companies that operate in the same sector of activity, perform similar broad functions and do not present economic characteristics that are obviously different. The list is then refined using selection criteria and publicly available information (e.g. from databases,...

OECD COVID-19 TPG paragraph 31The COVID-19 pandemic has created economic conditions that often differ from those of previous years. In these circumstances, where a taxpayer rolls forward an existing set of comparables to cover FY2020, it may be necessary to review the suitability of these existing comparables and potentially in some cases, it may...

OECD COVID-19 TPG paragraph 32For example, assume that geographic comparability is deemed as the most relevant comparability factor given the nature of the effects of COVID-19 in a particular market. In these circumstances, in order to obtain reliable data from a particular market it may potentially be necessary to relax other comparability criteria, and...

TPG2022 Chapter III paragraph 3.79The 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....

TPG2022 Chapter III paragraph 3.57It 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...

TPG2022 Chapter III paragraph 3.54Ensuring 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...

Supplemental Guidance

Romania vs “A. S.R.L.”, October 2022, Supreme Administrative Court, Case No 4859/2022A Romanian company was assessed additional taxable income after an audit found its reported 10% profitability on sales to a related party was not achieved, resulting in significantly underpaid corporate tax. The tax authority applied TNMM using the median ROTC indicator from comparable independent companies. Romania's Supreme Administrative Court dismissed...

Spain vs. Zeraim Iberica SA, June 2018, Audiencia Nacional, Case No. ES:AN:2018:2856A Spanish subsidiary of the Syngenta Group disputed tax assessments for 2008–2009 concerning arm's length pricing of seeds acquired from an Israeli affiliate. The company argued a Franco-Swiss APA exposed flaws in the Spanish tax authority's benchmark, which attributed margins of up to 32.79%. The Audiencia Nacional upheld the authority's...

Panama vs “Petroleum Wholesale Corp”, September 2020, Administrative Tribunal, Case No TAT-RF-062A Panamanian petroleum wholesale distributor contested a $14 million transfer pricing assessment covering fiscal years 2013 and 2014, after tax authorities identified inconsistencies between its transfer pricing documentation and financial reports. The Panama Administrative Tribunal ruled in favour of the tax authority in September 2020, upholding the assessment with only...

Greece vs “Agri Ltd”, july 2020, Administrative Tribunal, Case No A 1514/2020A Greek agricultural machinery group priced intercompany sales to its German distributor using TNMM with itself as the tested party. The Greek tax authority recharacterised the transactions, applying a cost-plus method with the German subsidiary as tested party. The Administrative Tribunal upheld the revised assessment in 2020, finding the authority's...

Greece vs “G Pharma Ltd”, july 2020, Administrative Tribunal, Case No 1582/2020A Greek pharmaceutical distributor buying exclusively from affiliates reported losses for 17 consecutive years. The tax authority applied the TNMM, arguing a limited risk distributor should earn a small guaranteed positive return. The Administrative Tribunal dismissed the company's appeal in 2020, upholding the assessment and confirming the arm's length range...

Romania vs “Machinery rental” S.C. A. SRL, September 2020, Supreme Administrative Court, Case No 4453/2020A Romanian company challenged a tax authority assessment that rejected intra-group machinery rental expenses for 2010 to 2013. The dispute centred on whether year-by-year or multi-year financial data should be used in the comparability analysis. Romania's Supreme Administrative Court ruled mostly in favour of the taxpayer in September 2020, affirming...

Romania vs “Milk and Dairy” A. SA, September 2020, Supreme Administrative Court, Case No 4702/2020A Romanian dairy company challenged a transfer pricing assessment covering both production and distribution activities, arguing the tax authority improperly replaced market prices and that a forensic expert report supported its position. The Supreme Administrative Court dismissed the appeal in 2020, upholding the tax authority's use of the median and...

Romania vs “Electrolux” A. SA, November 2020, Supreme Administrative Court, Case No 6059/2020A Romanian manufacturer and distributor in the Electrolux group was assessed by tax authorities after reporting consistent losses while the wider group remained profitable. Authorities applied a benchmark study comparing net profit margins against independent household appliance traders, with adjustments for depreciation and extraordinary costs. Romania's Supreme Administrative Court remanded...