The Transfer Pricing analysis is performed by comparing related party transactions with independent (comparable) party transactions. This is to demonstrate compliance with the Arm’s Length Principle.
In certain cases, a single figure, such as a price or margin, can be obtained as a comparable, working as the most reliable benchmark for assessing whether a trade meets arm’s length conditions. Conversely, given that the Transfer Pricing analysis is not an exact science, the application of the most appropriate methods can usually lead to obtaining a range of figures, where, after using all the criteria and details of comparability objectively, these all have a high degree of comparability. Hence, all the operations in a given sample would qualify as comparable.
In these situations, discrepancies in the range can generally occur because the Arm’s Length Principle only allows the conditions given among independent enterprises. It is also plausible that the variations in the range reflect the reality that independent firms conducting comparable transactions in similar circumstances do not necessarily set the same price for that transaction.
Thus, the breadth of the sample of figures, i.e., the differential between the minimum and maximum value of the sample, is usually relatively high. For example, we can find a minimum indicator of 5% and a maximum of 45%, which, for many, is an indicator that, depending on the method selected for analysis, can result in operations or companies that probably should not be part of the sample. In statistical terms, the sample would have a high coefficient of variation.
In this regard, the coefficient of variation is a statistical measure that expresses the relative variability of a data set in percentage (comparable) terms. It is calculated as the ratio of the standard deviation to the mean and expressed as a percentage. This coefficient is used in various fields, including finance, statistics, and economics, to assess the dispersion of data relative to its mean.
In the Transfer Pricing context, the coefficient of variation is necessary to assess the consistency and comparability of the reported information. This is because it helps to measure the relative variability of the values of comparables about their mean. If the data is highly variable compared to its average, it may indicate external factors affecting prices and could compromise comparability. Conversely, a low coefficient of variation can indicate greater consistency in comparables, which is critical to ensure that prices are comparable over time and across different transactions, allowing for an efficient comparability analysis, which is essential for transfer pricing analyses.
Thus, the OECD Transfer Pricing Guidelines 2022 established in section 3.57 that, due to limitations in the information available from comparables, there may be certain defects unidentified, unquantified, and unadjusted in comparables. Thus, in cases of the interquartile range or any other percentile where the samples have a relevant size or a high coefficient of variation, statistical tools can be applied to adjust the range of the sample and thus increase the reliability of the sample. Consequently, for a correct analysis in a Transfer Pricing study, the use of comparability criteria and the coefficient of variation of potential comparables should be considered.
In the case of the Peruvian Transfer Pricing regulations, the comparability range will be calculated by applying the interquartile method. Conversely, the use of the uncontrolled comparable price method also emphasizes that the application of the interquartile range does not seem so relevant because each point in the sample is necessarily a reflection of a comparable market price (high level of comparability). Thus, in these cases, the use of the total range as a market range without applying the interquartile range (the range will have as a minimum value the one that corresponds to the lowest value of the prices or amounts of consideration of comparable transactions and as a maximum value the one that corresponds to the highest value of these) is frequent. For these purposes, the prices or amounts of consideration for comparable transactions are considered a high level of comparability if the coefficient of variation applied to the values of comparable transactions does not exceed 3%.
In the complex Transfer Pricing world, the use of the coefficient of variation emerges as a valuable tool for assessing the consistency and comparability of prices across business entities. By considering the relative variability of data, companies can identify risks, strengthen their position in tax audits, and improve the management of their global operations. Finally, the understanding and effective application of the coefficient of variation contributes to more informed decision-making and compliance with international tax regulations related to Transfer Pricing, such as Local Reports, Profit Tests, and Market Range Study, among others, as well as strengthening the transfer pricing documentation that must be available in the event of an audit process.
