In order to determine the market value of transactions that would have been agreed upon by independent persons or entities at arm’s length, the circumstances of the related transactions are compared with the circumstances of transactions between independent persons or entities that could be comparable.

The so-called comparability analysis constitutes the basic element for the choice of the most appropriate valuation method, in that it will make it possible to determine whether two or more transactions are comparable.

Stages in the analytical process

  1. Preliminary analysis
  2. Selection of the transfer pricing method
  3. Identification of potential comparables
  4. Conclusion to determine whether the transactions comply with the arm’s length principle.

The OECD proposes the implementation of a standard process to facilitate the performance of such analysis, although its application is not mandatory:

  1. Determination of the years subject to analysis
  2. Analysis of the company’s circumstances
  3. Understanding the related transaction, in particular, the functional analysis and identifying important comparability factors to be taken into account
  4. Review of existing internal comparables, if any
  5. Determination of available sources of information on external comparables where necessary, taking into account their relative reliability
  6. Selection of the most appropriate transfer pricing method and, depending thereon, determination of the relevant financial indicator
  7. Identification of potential comparables
  8. Determination and application of the relevant comparability adjustments
  9. Interpretation and use of the data collected and determination of compliance with the arm’s length principle.

It should be noted that this is not a linear process:

• there are steps that may be repeated,
• or even have to repeat the process due to a lack of comparables,
• or because it is not possible to make the necessary adjustments to obtain a satisfactory result.

Different types of comparables

  1. Internal comparables: compares similar transactions that the same company performs with other related and unrelated companies
  2. External Comparables: a search is carried out using databases containing information on transactions between independent companies, and these are compared with the transaction carried out between the company under study and its related company.

Finally, it is considered good practice when companies that use comparables to justify that the transactions carried out with related parties are at market value, or when the tax administration uses them to make a transfer pricing adjustment (tax inspection), to provide the other interested party with the supporting information that allows the reliability of the comparables used to be assessed.

Juan Mosquera

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