On 24 January 2017 the Platform for Collaboration on Tax released a draft toolkit on comparables. The toolkit is designed to assist developing countries to manage situations where there is a lack of comparable transactions for use in transfer pricing analyses. The Platform for Collaboration on Tax was set up by the IMF, OECD, UN and World Bank at the request of the G20 group of countries. Comments on the draft toolkit are invited from interested parties by 21 February 2017.
In many countries the information required for local comparable transactions does not exist or is not available in a form that can be used in a transfer pricing analysis. The toolkit explores approaches that can be taken to increase the pool of comparable data and improve access to existing data. The draft toolkit notes that accurate delineation of the transaction and selection of the most appropriate transfer pricing method is often more important for determining the arm’s length price than the level of the selected financial indicator.
The toolkit details the comparability analysis and the search process based on any available commercial databases. Measures to make the most of the existing data include the use of date from foreign markets; use of data from widened search criteria; and the use of comparability adjustments. The toolkit also looks at approaches to implementation of transfer pricing rules that rely less on publicly available comparable data. These approaches include safe harbors, benefit tests, profit splits and protective measures. As transfer pricing is not an exact science the toolkit points out that the transfer pricing analysis is the application of the principle to a set of facts and not merely mechanical following of a series of steps. It involves flexibility and judgment.
Safe harbors
The draft toolkit proposes safe harbor measures such as setting a safe harbor price or margin allowing taxpayers to opt out of the regime, while ensuring that transactions carried out under the safe harbor are within the scope of the country’s double tax treaties including measures for relief from double taxation. The major trading partners of a country could be consulted while developing the safe harbor rules.
Data available to tax administrations
Date received by the tax administration in tax returns is confidential and cannot be disclosed in its original form. However the toolkit proposes that work could be conducted to test the feasibility of using this information in a modified form to protect confidentiality.
Selection of appropriate transfer pricing method
Accurate delineation and selection of the most appropriate transfer pricing method can often impact the allocation of profit between countries more than the level of the relevant financial indicator. Developing countries could therefore emphasize analysis of the transaction and selection of the method. In pricing the sale of commodities or other property, if the comparability analysis indicates the comparable uncontrolled price (CUP) method should be used the toolkit suggests that the price may be determined by reference to a quoted price if available.
If the analysis indicates a one-sided method as appropriate the evaluation of the economically relevant characteristics of the transaction can make best use of available comparables and this could include comparables from foreign markets. If however the analysis indicates that the profit split method is appropriate then data on comparables may not be necessary.
Where a transfer pricing case involves a significant risk of tax loss and the comparable data is not sufficient to allow the appropriate transfer pricing method to be applied effectively the tax administration could use an anti-avoidance measure such as the measures recommended in action 4 of the project on base erosion and profit shifting (BEPS) on deductibility of interest.
