Transfer Pricing has become a key element in the financial management of companies operating worldwide. The need to ensure that related-party transactions are at market value requires an optimal comparability analysis, discussing internal and external comparables.
Herein, we will explore the essential considerations when choosing between internal and external comparables, regardless of the analysis method chosen, highlighting the significance of accurate selection for a market range.
Use of Internal Comparables
The use of internal comparables entails analyzing transactions between the tested company and a related company, as well as with an independent one. This form of comparison, direct and related, is ideal and easily accessible to the company. Conversely, its effectiveness depends on substantial comparability in contractual terms, functional analysis, transaction characteristics, economic circumstances, and business strategies. If these conditions are not met, then there must be adjustments available to ensure the reliability of the analysis.
Use of External Comparables
The use of external comparables entails analyzing transactions between the tested company and the independent companies. Although this approach offers a wider perspective, it comes with significant challenges. Most of the information belongs to both public and private companies, and the search for suitable comparables can take more time. Despite these difficulties, the use of external comparables is accepted by tax administrations as long as the established conditions are met. The verification of transactions at market value remains crucial after the analysis has been completed.
Strategic Selection: Internal vs. External
The selection between internal and external comparables should be strategic and based on available information. From our experience, Tax Administrations prefer the use of internal rather than external comparables, given that these could be perceived as more reliable theoretically, but their reliability will depend on substantial comparability. Conversely, external comparables, although harder to obtain, offer diversity and may be acceptable as long as all conditions are met. The correct choice lies in assessing the availability of data and the reliability of the information.
Conclusion
In the complex Transfer Pricing area, the choice between internal and external comparables is crucial to ensure a compliant and accurate analysis. Although the use of internal comparables is preferred, their suitability must be thoroughly assessed. External comparables, despite the associated challenges, should not be ruled out due to the support of the tax authorities for their use as long as the established requirements are met. The key lies in a strategic selection based on the availability of information and reliability of data, thus guiding companies towards a rigorous and reliable Transfer Pricing analysis.
