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Last updated on 2024年8月23日

How do you benchmark complex or unique transactions that have no comparable data?

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Transfer pricing is the process of setting the prices of goods, services, intangibles, or financial transactions between related entities within a multinational group. It affects the allocation of profits and taxes across different jurisdictions and is subject to complex rules and regulations. One of the main challenges of transfer pricing is to benchmark the arm's length nature of the intercompany transactions, that is, to compare them with similar transactions between independent parties. But what if there are no comparable data available for complex or unique transactions? How can you justify the transfer prices in such cases? In this article, we will explore some of the methods and approaches that can help you benchmark complex or unique transactions that have no comparable data.

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Ajit Jain

Partner at AJMS LG | LinkedIn top Voice in Transfer Pricing | TP Professional with 13 years of experience in India…

1 Identify the relevant factors

The first step is to identify the relevant factors that affect the pricing of the transaction, such as the functions performed, the assets used, the risks assumed, the market conditions, the contractual terms, and the economic circumstances. These factors should reflect the economic substance and value creation of the transaction, and not just the legal form or accounting treatment. By identifying the relevant factors, you can narrow down the scope of potential comparables and adjust for any differences.

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2 Use multiple methods

The second step is to use multiple methods to test the arm's length nature of the transaction, depending on the availability and reliability of the data. The OECD Transfer Pricing Guidelines provide five methods that can be applied: the comparable uncontrolled price method, the resale price method, the cost plus method, the transactional net margin method, and the transactional profit split method. Each method has its advantages and limitations, and some may be more suitable for certain types of transactions than others. For complex or unique transactions, it may be necessary to use more than one method to corroborate the results and address any uncertainties.

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Ajit Jain

Partner at AJMS LG | LinkedIn top Voice in Transfer Pricing | TP Professional with 13 years of experience in India, Middle East (PwC) and UK (KPMG London) | Author NRI MiTRA | ICAI Int. Research awardee | DITT UK
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For benchmarking complex or unique transactions, focus on economic and commercial factors rather than traditional methods. This involves analyzing the transaction's economic substance, commercial rationality, and strategic value. Evaluate why the transaction was undertaken, whether it makes commercial sense, and its contribution to the business's goals. Use economic valuation techniques like DCF or option pricing models to estimate value. For example, in transferring a unique software platform, consider its strategic importance, expected revenue, and market impact, ensuring the analysis reflects the transaction's true economic value.

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3 Apply valuation techniques

The third step is to apply valuation techniques to estimate the arm's length price of the transaction, especially for intangibles or financial transactions that have no comparable data. Valuation techniques are based on the principle of fair market value, which is the price that would be agreed between independent parties in a hypothetical transaction. There are three main approaches to valuation: the income approach, the market approach, and the cost approach. Each approach has its own assumptions and methods, such as discounted cash flow, comparable transactions, or replacement cost. Valuation techniques should be consistent with the transfer pricing principles and reflect the specific features and risks of the transaction.

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4 Use internal comparables

The fourth step is to use internal comparables, that is, transactions between one of the related parties and an independent party, to benchmark the intercompany transaction. Internal comparables may be more reliable than external comparables, as they are more likely to share the same relevant factors and reflect the same market conditions. However, internal comparables may not always be available or sufficiently comparable, and they may also raise issues of confidentiality and consistency. Therefore, internal comparables should be used with caution and adjusted for any material differences.

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5 Document and explain

The fifth step is to document and explain the rationale and assumptions behind the transfer pricing analysis, and to demonstrate how the chosen methods and data support the arm's length nature of the transaction. Documentation is essential to comply with the transfer pricing rules and regulations, and to avoid or resolve any disputes or adjustments by tax authorities. Documentation should be clear, comprehensive, and coherent, and should include relevant information such as the functional analysis, the selection and application of the methods, the sources and adjustments of the data, the valuation techniques, and the results and conclusions.

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Nick Miller

Transfer Pricing and International Tax Specialist
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You don’t with unique transactions because there are no benchmarks. Instead you look at where the value is created and the risks borne and managed and allocate the reward accordingly. A complex non unique transaction may have potential comparables but these are likely to be few and it may be best to use more than one method.

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6 Review and update

The sixth step is to review and update the transfer pricing analysis periodically, or whenever there are significant changes in the facts and circumstances of the transaction or the market. Transfer pricing is not a static exercise, but a dynamic and ongoing process that requires regular monitoring and evaluation. Reviewing and updating the transfer pricing analysis can help you ensure that the transfer prices remain arm's length and reflect the current economic reality, and that you can respond to any new challenges or opportunities.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How do you benchmark complex or unique transactions that have no comparable data?

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1 Identify the relevant factors

2 Use multiple methods

3 Apply valuation techniques

4 Use internal comparables

5 Document and explain

6 Review and update

7 Here’s what else to consider

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