Step 3 – Benchmarking study / arm’s length compliance description

When preparing the 2019 TPR, you have probably updated yourself on the benchmarking studies or arm’s length compliance descriptions that need to be prepared. We will highlight all the important issues for attention and, if necessary, prepare a complete set of studies for you.

The benchmarking study and description of compliance are key elements of transfer pricing reporting. They verify whether intercompany transactions have been made at arm’s length, i.e. whether independently operating entities would be willing to enter into a transaction on terms equivalent to those of the intercompany transaction in question. When preparing this information, there are several important points to bear in mind.

Firstly,  which transactions must be documented and therefore benchmarked or described in terms of compliance should be determined. If the conditions of the transactions whose arm’s length nature needs to be verified are identical or very close to those of transactions with unrelated parties, you will be required to prepare a benchmarking study stating that you have applied arm’s length pricing. This study should demonstrate that the transactions being compared (i.e. your intercompany transaction and a transaction with an unrelated enterprise) are similar.

If you do not enter into comparable transactions with unrelated parties, the issue becomes more complicated. In such a case you will need to develop a consistent methodology for finding comparable transactions or businesses involved in such transactions, determine their financial result and then compare this to your company’s result, demonstrating the similarity of the transactions being compared. To do so, you may need access to a database and it may prove more costly for you to prepare the study yourself than to have it done by advisers.

There are also additional challenges with analysing the arm’s length nature of a transaction. Some transactions may be so unique that traditional benchmarking will not be possible or the data will be unavailable. In such a case you will be required to prepare the so-called description of compliance, i.e. a document which demonstrates, using available methods and data, that the transaction is in compliance with the arm’s length principle. This document may only be prepared if you can prove that it was impossible to conduct a regular benchmarking study.

How we can assist

Our support includes:

• carrying out benchmarking studies for the transactions you identify;
• preparation of compliance descriptions for transactions where a standard benchmarking study cannot be made;
• if necessary – drafting of opinions confirming no obligation to prepare tax documentation;
• review of your existing benchmarking study/compliance description identifying strengths and areas of risk.