Arm´s length principle: Current developments in the use of European comparative data

Published on August 25, 2016

Article 9 of the OECD Model Tax Convention describes the basis of an arm´s length profit sharing between related parties. In this context the general principle of ”dealing-at-arm´s-length” applies for determining the transfer prices. In view of the compliance with the arm´s length principle there is a need to have the possibility to access arm´s length data.
 
In practice the generation of arm´s length data by using database analyses can increasingly be observed. But the evaluation of the results often cause disputes with regard to the comparability.
 
In this respect the 46^th conference of the EU Joint Transfer Pricing Forum (EUJTPF) took place on February 18, 2016 with the focus on comparables in the EU. A discussion paper that points out a number of problems concerning available data in the EU was published before the conference. Central discussion points were possible comparability adjustments, the use of multiple-year data, the interpretation of ranges (e.g. interquartile range) as well as the comparability of the European entities in general. The aim of the conference was to prepare a guideline for determining comparable data. Therefore general approaches for database analyses as well as practical solutions were discussed.
 
The participants especially dealed with the use of Pan-European comparables which often cause disputes concerning the acceptance of benchmark companies due to country-specific differences. For the recognition of such data the OECD Transfer Pricing Guideline mentions that non-resident comparables should not automatically be rejected just because they are not domestic (OECD-GL 2010, note 3.35). Nevertheless, with the published BEPS Action plan the OECD clarifies that local comparables would be preferable to regional comparables (BEPS Action 13, note 46).
 
For the following conference on June 23, 2016 a study about the suitability of Pan-European comparables was commissioned. The study proved that Pan-European comparables regarding the availability, accessibility and reliability are suitable for the implementation of an arm´s length comparison. In total the analyses in specific regions and industries show that there are no significant differences between the identified Pan-European ranges and the country-specific ranges. This suggests that Pan-European ranges are suitable to fulfil the prerequisites of the arm´s length principle.
 
In the Draft Report, the members of the EU Joint Transfer Pricing Forum recommend that a deductive approach for preparing database analyses is preferable to an additive approach. This is intended to generate a high amount of benchmark entities. Based on various criteria and in connection with a detailed comparability analysis for each identified potential benchmark entity the number of benchmark entities can be narrowed.
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After further discussions the Final Report for the implementation of database analyses of the EU Joint Transfer Pricing Forum is eagerly awaited.