The Search for Comparables in Transfer Pricing

By Robert Robillard - 28 mai 2014

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Paragraph 3.4 of the Transfer Pricing OECD Guidelines explains:

“Below is a description of a typical process that can be followed when performing a comparability analysis. This process is considered an accepted good practice but it is not a compulsory one, and any other search process leading to the identification of reliable comparables may be acceptable as reliability of the outcome is more important than process (i.e. going through the process does not provide any guarantee that the outcome will be arm’s length, and not going through the process does not imply that the outcome will not be arm’s length).

Step 1: Determination of years to be covered.

Step 2: Broad-based analysis of the taxpayer’s circumstances.

Step 3: Understanding the controlled transaction(s) under examination, based in particular on a functional analysis, in order to choose the tested party (where needed), the most appropriate transfer pricing method to the circumstances of the case, the financial indicator that will be tested (in the case of a transactional profit method), and to identify the significant comparability factors that should be taken into account.

Step 4: Review of existing internal comparables, if any.

Step 5: Determination of available sources of information on external comparables where such external comparables are needed taking into account their relative reliability.

Step 6: Selection of the most appropriate transfer pricing method and, depending on the method, determination of the relevant financial indicator (e.g. determination of the relevant net profit indicator in case of a transactional net margin method).

Step 7: Identification of potential comparables: determining the key characteristics to be met by any uncontrolled transaction in order to be regarded as potentially comparable, based on the relevant factors identified in Step 3 and in accordance with the comparability factors set forth at paragraphs 1.38-1.63 [of the OECD Transfer Pricing Guidelines].

Step 8: Determination of and making comparability adjustments where appropriate.

Step 9: Interpretation and use.“

In Canada, TPM-14 2010 Update of the OECD Transfer Pricing Guidelines indicates:

“Although section 247 of the Income Tax Act does not prescribe a particular structure for undertaking a comparability analysis, the CRA endorses the “typical process” outlined in the Guidelines. In performing this analysis, taxpayers are required to make reasonable efforts to determine and use arm’s length prices or allocations in respect of transactions or series. Where reasonable efforts are not made, a taxpayer may be subject to reassessments and penalties.“

In the United States, item (e)(2)(ii) of section 482, §1.482-1 Allocation of income and deductions among taxpayers, explains:

“(ii) Selection of comparables. Uncontrolled comparables must be selected based upon the comparability criteria relevant to the method applied and must be sufficiently similar to the controlled transaction that they provide a reliable measure of an arm’s length result. […]“

In all cases, the search for comparables should reflect the comparability analysis and take into account every relevant factor as they apply to the controlled transaction.

Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
514-742-8086; robert.robillard « at »

RBRT Inc. is all about transfer pricing. We specialize in transfer pricing. Our services include transfer pricing documentation, transfer pricing dispute resolution, advanced pricing agreement (APA), value chain management and TP planning, transfer pricing training. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. RBRT Inc. and the author are not responsible or liable for any error, omission or inaccuracy in such information. Readers should seek independent tax advice and tax counsel from RBRT Inc. as required.

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