INTM467100 - Establishing the arm's length price: gathering your own evidence
Searching for comparables: internal comparables
The best source of comparables will be within the group itself.
A large group will have contracts and trading relationships with
many customers, suppliers, contractors, etc. Compare the prices,
terms and conditions of transactions with affiliates with the
prices, terms and conditions of transactions with independents.
A search for internal comparables is sometimes overlooked by
groups when they are considering their transfer pricing policy and
compiling documentation to demonstrate that the pricing is at
arm’s length. If the transfer pricing documentation makes no
mention of internal comparables, you should establish what work has
actually been done to find out if there are any. While you will
want to avoid a 'back to the drawing board' approach, this might be
necessary when this potential source of comparables has not been
considered. Often your alternative will be to look at external
comparables. You need to ensure that the best available comparables
are being considered.
Where a group has considered internal comparables, you will
need to examine carefully why transactions have been discarded as
not being similar enough, or whether the work carried out has been
thorough enough. With a potentially huge number of comparable
transactions, a search can be a daunting task. In such cases try
and agree what exactly the significant transactions are; if
necessary can they be broken down? This will hopefully make it
easier to narrow the search. You may find that some transactions
have been discarded because they are not identical. Remember
adjustments can be made in some cases. Even with adjustments,
internal comparables are likely to provide better evidence than the
net margins of other third party companies.
Internal comparables can also give useful information about
the terms of transactions and likely rewards. You may find examples
of transactions with third parties which feature
- contracts for distributors or commission agents which are based on turnover generated;
- contracts for manufacturing which contain incentives for quality and production times;
- and contracts for R & D which give the other party rights to royalty payments in the event that their work ultimately results in new products.
The facts might lead you to conclude that similar transactions with affiliates should be on the same terms.
