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What are the best practices for selecting and applying comparables in MAP cases?

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One of the most challenging aspects of transfer pricing is finding and using reliable comparables to support the arm's length principle. Comparables are independent transactions or entities that can be used as benchmarks to evaluate the transfer prices of related parties. However, comparables are not always easy to find, especially in complex or unique transactions, or in different markets or jurisdictions. This can lead to disputes between taxpayers and tax authorities, and potentially trigger a mutual agreement procedure (MAP) to resolve them. A MAP is a mechanism that allows competent authorities of two or more countries to consult and negotiate on a transfer pricing adjustment that affects the taxable income of a taxpayer in both countries. In this article, you will learn what are the best practices for selecting and applying comparables in MAP cases, and how to avoid common pitfalls and errors.

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Leverage the OECD framework:

Following the OECD guidelines ensures a structured approach to selecting comparables. By adhering to this five-step process, you can confidently support your transfer pricing analysis.### *Diversify your data sources:Utilize multiple sources like databases, industry reports, and third-party contracts to enhance reliability. This broadens your analysis and mitigates the biases inherent in relying on a single source.

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1 Follow the OECD guidelines

The first and foremost best practice is to follow the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, which provide a comprehensive framework and guidance for selecting and applying comparables in transfer pricing analysis. The OECD guidelines are widely accepted and followed by most countries, and are often referred to by competent authorities in MAP cases. The OECD guidelines recommend using a five-step process to identify comparables: (1) determine the years to be covered; (2) select the most appropriate transfer pricing method; (3) identify the relevant characteristics of the transactions or entities to be compared; (4) select potential comparables from publicly available sources; and (5) compare the conditions of the transactions or entities and make appropriate adjustments if necessary.

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Jaminur Amin Ratul

Accountant | Expert in Excel, Budgeting & Forecasting, Financial Planning
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The OECD Transfer Pricing Guidelines provide detailed guidance on selecting and applying comparables, and adhering to them increases the chances of acceptance by both tax authorities.

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Suhash Kantamneni

Transfer Pricing @ Danfoss | EY
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MAP is a post-facto alternate dispute resolution mechanism to mitigate double taxation. In an MAP, negotiations happen between competent authorities of relevant jurisdictions and it does not involve any or at least active involvement of taxpayers. Since MAP can be sought after an event causing double taxation has occurred, in most cases, documentation and domestic litigation/ assessment/ APA proceedings that have ensued until date are used for negotiation. Therefore, there may be no chance to provide fresh comparability analysis in an MAP proceedings. Some additional analysis may be accepted by respective competent authorities. This could have persuasive value in negotiations at best.

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2 Use multiple sources of comparables

Another best practice is to use multiple sources of comparables, such as databases, reports, studies, industry publications, or third-party contracts, to increase the reliability and credibility of the transfer pricing analysis. Using multiple sources can help to overcome the limitations and biases of any single source, and to capture a wider range of comparable transactions or entities. However, using multiple sources also requires careful screening and filtering of the data, as well as consistency and transparency in the selection criteria and the application of adjustments. Moreover, using multiple sources may not always be feasible or cost-effective, especially in cases where there is a lack of comparable data in the relevant market or jurisdiction.

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Jaminur Amin Ratul

Accountant | Expert in Excel, Budgeting & Forecasting, Financial Planning
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Don't rely solely on public databases. Consider internal databases, industry publications, market research reports, and expert opinions to find a wider range of relevant comparables.

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3 Consider the local market conditions

A third best practice is to consider the local market conditions of the transactions or entities to be compared, and to use comparables that reflect those conditions as much as possible. Local market conditions can include factors such as the level of competition, the availability of resources, the regulatory environment, the consumer preferences, the economic situation, or the currency fluctuations. These factors can have a significant impact on the profitability and risk profile of the transactions or entities, and thus affect the arm's length range of transfer prices. Therefore, it is important to use comparables that operate in similar or comparable markets, or to make appropriate adjustments to account for the differences in market conditions.

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4 Document the selection and application process

A fourth best practice is to document the selection and application process of comparables in a clear and comprehensive manner, and to provide sufficient evidence and explanation for the choices and assumptions made. Documentation is essential for demonstrating the reasonableness and consistency of the transfer pricing analysis, and for supporting the arm's length nature of the transfer prices. Documentation can also help to prevent or resolve disputes with tax authorities, or to facilitate the MAP process if a dispute arises. Documentation should include information such as the sources and criteria used to select comparables, the adjustments made to eliminate material differences, the statistical methods used to determine the arm's length range, and the sensitivity analysis performed to test the robustness of the results.

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Jaminur Amin Ratul

Accountant | Expert in Excel, Budgeting & Forecasting, Financial Planning
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Clearly document the criteria used to select comparables, the rationale behind each choice, and the sources used to find them. This transparency builds trust and facilitates communication with the tax authorities.

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5 Review and update the comparables regularly

A fifth best practice is to review and update the comparables regularly, and to reflect any changes or developments that may affect the transfer pricing analysis. Comparables are not static, but dynamic, and may vary over time due to factors such as market conditions, business strategies, product life cycles, or technological innovations. Therefore, it is important to monitor and update the comparables periodically, and to ensure that they remain relevant and reliable for the transfer pricing analysis. Reviewing and updating the comparables can also help to identify any potential risks or opportunities for the transfer pricing policy, and to adjust it accordingly.

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6 Seek professional advice

A sixth and final best practice is to seek professional advice from experts or consultants who have experience and expertise in transfer pricing and MAP cases. Transfer pricing is a complex and evolving field, and requires a high level of technical knowledge and analytical skills. Moreover, MAP cases can involve multiple jurisdictions, different tax systems, conflicting interpretations, and lengthy negotiations. Therefore, it can be beneficial to seek professional advice from qualified and reputable professionals who can provide guidance, support, and representation in the selection and application of comparables in MAP cases. Professional advice can also help to avoid or minimize errors, disputes, penalties, or double taxation.

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Jaminur Amin Ratul

Accountant | Expert in Excel, Budgeting & Forecasting, Financial Planning
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Complex MAP cases often benefit from the expertise of qualified transfer pricing specialists. They can guide you through the process, ensure compliance with regulations, and strengthen your arguments.

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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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What are the best practices for selecting and applying comparables in MAP cases?

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1 Follow the OECD guidelines

2 Use multiple sources of comparables

3 Consider the local market conditions

4 Document the selection and application process

5 Review and update the comparables regularly

6 Seek professional advice

7 Here’s what else to consider

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