Preparing a benchmark study: A practical approach

In ensuring that a transaction or entity is ‘comparable’ to that in scope, the OECD Guidelines require the performance of a comparability analysis, whereby the uncontrolled transaction or company is examined in terms of the relevant factors, to ensure that it is in fact comparable with the controlled transaction or company. 

Two approaches can be undertaken when conducting a comparability analysis: the additive approach and the deductive approach.

 

• The additive approach

This approach involves building a list of comparables (transactions or companies, depending on the method to be applied) based on relevant criteria. The list of comparables may be drawn up by either analysing competitors’ data or via internet searches, which may present challenges in obtaining financial information which is relevant and reliable. For this reason, this approach is not commonly used in practice.

• The deductive approach

This approach starts with a large initial set of transactions or companies (depending on the method to be applied), which is narrowed down using search criteria, with the aim of excluding transactions or companies which are not in fact comparable to the subject transaction or company. Such approach to performing a benchmark study, has a number of benefits compared to the additive approach such as replicability and international recognition, making it generally preferred by the tax authorities. 

A benchmark study, adopting the Deductive Approach in practice: A step-by-step summary

Step 1: Selection of a database

The first step in searching for comparable data is the selection of a database. Some examples of well-known databases include the Bureau van Dijk, Bloomberg and RoyaltyStat databases. The selection of a database may depend on the location of the tested company, industry in which the tested party operates, nature of in-scope transaction, etc.

Step 2: Initial search 

Comparables are selected based on search criteria which has an impact on the comparability of the transaction / company, such as;

• Geographical location – search may be restricted to companies / transactions operating or carried out in a similar geographical area as the tested company / transaction.
• Independence – companies which are not independent, that is, companies belonging to a group whose financial data may be tempered by transfer pricing adjustments may be excluded.
• Availability of financial data for the year/s under scope – companies whose financial data is not available for the relevant year, may be excluded.
• Industry – companies operating or transactions carried out in industries dissimilar to that of the tested party / transaction, may not be relevant to include in the benchmark study. In the European community, industry selection is typically done by reference to ‘NACE’ codes. 

Step 3: Bulk rejections 

Once a list is produced by the initial search, the next step would be to exclude data from same list, based on certain (more stringent) factors such as the size of the company and financial ratios. Loss-making companies are typically excluded at this stage as well. 

Step 4: Manual review 

During this step, perhaps the most time-consuming one, comparable entities are manually reviewed, generally via their website or other publicly available information, such as annual financial statements. In this step, companies which offer non-comparable products, or perform different activities or have different functions are manually eliminated. 

Step 5: Arm’s length range

After conducting steps 1-4 of the analysis, a range of equally reliable arm’s length results are obtained. Given that the results might vary substantially, statistical tools are used to narrow the range, as generally encouraged by tax authorities. 


The interquartile range statistical tool is commonly used to eliminate extreme values, whereby the lowest and highest 25% of the results are excluded. This would result in the interquartile range of the arms’ length price, which is then to be compared to the actual price applied (or to be applied) to the inter-company transaction.

In a price-setting scenario, this would be the basis to determine the contractual price to be applied, or, in a price-testing scenario, whether a transfer pricing adjustment is required to be made to the intra-group price in order to align the price that is brought to tax (be it, cost or revenue), with that considered as being on arms’ length terms, as recognised by the OECD Guidelines. 

How We Can Help

BDO Malta’s transfer pricing specialists support businesses in preparing benchmark studies that align with OECD Guidelines and tax authority expectations. From database selection to comparability analysis and determining an arm’s length range, we provide practical, data-driven solutions to ensure compliance and reduce risk. Contact us at taxadvisory@bdo.com.mt to see how we can assist your business.


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