Topic collection
Benchmarking & economics
Benchmarking is where a transfer pricing position becomes evidence. Screening logic, the choice of indicator, the range, and the adjustments you make are all defensible only if they are documented.
Benchmarking study
7 minThe documented process of finding independent comparables and using them to derive an arm's length price, margin, or range for a controlled transaction.
Benchmarking database
5 minA commercial database of company financials and business descriptions used to search for and screen potential comparables in a benchmarking study.
Comparability adjustment
6 minA numerical adjustment made to comparable or tested-party data to remove the effect of a material difference that would otherwise distort the comparison.
Comparable companies
5 minThe final set of independent companies accepted into a benchmarking study as sufficiently similar to the tested party to derive an arm's length range.
Functional analysis
7 minThe analysis of the functions performed, assets used, and risks assumed by each party to a transaction, forming the foundation for selecting a method and comparables.
Full cost mark-up
5 minA profit level indicator expressing operating profit as a percentage of the tested party's total (direct plus indirect) costs.
Multiple year data
5 minThe practice of using several years of financial results for the tested party and comparables, rather than a single year, to smooth out business cycle and one-off effects.
One-sided method
6 minA transfer pricing method that tests only one party to the transaction — the tested party — against a range derived from comparables, rather than analysing both sides.
Return on assets
5 minA profit level indicator expressing operating profit as a percentage of operating assets employed, used chiefly for capital- or asset-intensive tested parties.
Secret comparables
6 minComparables data that a tax authority holds and uses to challenge a taxpayer's position without fully disclosing the underlying companies or details to the taxpayer.
Working capital adjustment
6 minA comparability adjustment that normalises for differences in receivables, payables and inventory levels between the tested party and comparables, using an imputed interest rate.
Interest rate benchmarking database
5 minA commercial database of bond issuances, syndicated loans or CDS spreads used to source comparable third-party pricing for intercompany debt.
Deposit rate benchmarking
5 minBenchmarking the arm's length interest rate payable on an intercompany cash deposit, distinct from loan interest rate benchmarking.
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