In a globalisation context and the increasing complexity of transnational transactions, the correct application of the transfer pricing policies has become a fundamental aspect for companies operating in multiple jurisdictions.
For these purposes, the Benchmarking studies are a key tool in this process, allowing companies to justify their pricing policies to tax authorities and minimise the risk of adjustments or penalties.
To ensure that transactions between related companies are carried out at market values, tax authorities require benchmarking studies. But what exactly are these studies, why are they so relevant, and what are the criteria to be applied?
What is a benchmarking study, and why are these studies relevant?
In many jurisdictions, a benchmarking study is considered a principal requirement to comply with the transfer pricing regulations. As it’s known, a benchmarking study is a comparative analysis to determine if the prices or margins applied in transactions between related companies are aligned with those that would be applied in similar transactions between independent companies.
These studies are considered important since they are considered reliable to prevent any fiscal strategy and provide certainty to the tax authorities in consistency with:
- Compliance with local and international requirements.
- Justify your prices to the authorities.
- Minimise the risk of tax adjustments or sanctions.
- Improve the planning and management of your international transactions.
Principal considerations for elaborating a benchmarking study
The benchmarking study on a general basis must comply with the following assessment criteria, besides other considerations:
- To apply reliable databases: Amadeus, Orbis, or Bloomberg,
- To select the adequate comparable companies, by considering function, risk and assets, according to the comparability analysis,
- To document exhaustively the complete process (quantitative and qualitative criteria applied),
- To update the benchmarking study considering any industry movements and activities in the tested party.
The process of elaborating a benchmarking study begins with the identification of relevant transactions, selecting those between related companies that require analysis. Subsequently, considering the industrial code (NACE/SIC), financial and market data are collected from independent comparable companies, using various sources such as specialised databases, financial reports, and other reliable resources. Comparable companies that are similar in size, sector, functions performed, and risks are selected to ensure a valid and representative comparison.
These steps consider the application of criteria (quantitative and qualitative) according to each jurisdiction. The preparation of these studies requires a rigorous process that includes the identification of relevant transactions, the careful selection of comparable data analysis, and comparison with established market ranges, all based on reliable and up-to-date criteria.
The data collected is analysed by calculating key profit level indicators for the comparable companies. With this information, an interquartile range with statistical methodology is determined.
Finally, the company’s transaction is compared with these established ranges to assess if it complies with current regulations and whether its conditions are aligned with market prices.
Conclusions
In conclusion, transfer pricing benchmarking studies are an essential tool in a globalised context with increasingly complex international transactions. Benchmarking studies support companies in justifying their transfer pricing policies to tax authorities, reducing the risk of adjustments or penalties, and improving the management of their transnational operations.
As tax authorities are raising their standards and inspections are becoming more detailed, requiring specific explanations for each rejection and precise references to the information used is crucial. Technology finally enables achieving both quality and efficiency in this process. Well-conducted benchmarking not only guarantees regulatory compliance but also provides transparency and security in companies’ tax and commercial planning in a more regulated and competitive environment.
