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Tax Analysts




Comparability is the heart of transfer pricing. The OECD, U.K., Canadian, Australian, and U.S. transfer pricing rules all echo one another on how critically important the comparability analysis is. Performing this analysis and proving comparability, however, is a demanding exercise.

What makes proving comparability so difficult is that the analysis is two sided. Both controlled and uncontrolled transactions must be thoroughly analyzed. Just as much effort needs to be applied to determine the functions, contract terms, risks and the economic conditions for the unrelated party comparables as is spent on analyzing the related parties (taxpayers).

But there is more to this equation. On the “comparables side”, there are not one but two steps. First a comparables search is needed. Then the differences must be carefully scrutinized and adjust for differences if they are material.

Case law has always demanded balanced or dual comparability analysis. The OECD however, has recently become critical of database dumps - the extensive automated financial database searches for potential comparables that are then dumped on (or presented to) tax authorities as-they-are. This is problematical. The search is being substituted for meaningful analysis.

A database dump, no matter how well the screens are fit or how carefully crafted are the filters, never provides solid proof of comparables.

This paper considers a sequence in US and Australian cases where arguments based heavily on database searches are involved. Observations are extended to Canada and the UK.

The paper concludes that if searches for comparables in commercial databases are becoming the norm in transfer pricing and if there is a growing tendency to substitute the search itself for sound comparability analysis (the database dump), then what is the likely result on audit or through litigation is a profit split.

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