Transfer pricing benchmarking
The benchmark study is a very important tool within the field of transfer pricing. The transfer pricing benchmark analysis is used to set and test your transfer pricing policy. Transfer pricing compliance is one of the most important tax issues MNEs face.
What is transfer pricing Benchmarking?
Transfer pricing is about dividing results of multinationals at ‘arm’s length’, i.e. in line with how third parties would have divided results. Some entities of MNEs are quite complex, while the work performed by other companies or departments may also be outsourced (to some extent) to a third party. These functions include for example manufacturing, sales or routine support services. The department that performs such a function is called the ‘tested party’. During a benchmark study, we identify companies that perform an activity similar to the activity performed by the tested party. Subsequently, we can compare the profits of these companies with those of our tested party. Therefore, in a manual review you are comparing the potentially comparable companies with the specific activity of the tested party and not with the MNE as a whole. As such, the arm’s length range for intercompany services is determined.
If that activity is focused on keeping costs low (while maintaining quality) we use the Net Cost Plus Margin (“NCPM”) as the Profit Level Indicator (“PLI”), i.e. a mark-up on costs. If sales is the main driver, we use the Net Operating Profit Margin (“NOPM”), i.e. a margin on sales.
Types of transfer pricing benchmarking
A distinction can be made between benchmark studies within transfer pricing for:
- operational activities as manufacturing, sales or services (TNMM studies);
- licensing of IP (royalty studies);
- financial transactions / intercompany loans benchmark studies.
We have discussed the TNMM studies in this section.
The transfer pricing benchmark analysis
The first and most important step of the benchmark analysis is to set the right scope and to determine the search strategy. There are several variables that need to be determined to set the right scope. The most important variables are the geographical scope and the NACE code. The benchmark analysis is a crucial part of any transfer pricing documentation. We provide benchmark studies for all regions and with support from industry leading databases (Bureau van Dijk, Royalty Range and Bloomberg).
Your company may receive questions or audits from tax authorities due to the lack of a (proper) transfer pricing policy. It is very important to set an at arm’s length price. By having a well-documented transfer pricing policy, which is well substantiated by the means of the benchmark analysis, your company will avoid penalties and audits from tax authorities.
As explained, we use benchmarks to determine the at arm’s length price for intercompany transactions. The benchmark serves as evidence for the chosen compensation. Beware that the transfer pricing benchmark must be updated every three years. A financial / light update is advised every year.
How Quantera Global may be of service
Quantera Global assists your company in setting up a well-documented transfer pricing policy, by performing a full-fledged transfer pricing analysis. Or we can help you update the current policy (please keep in mind that benchmark analyses are only valid for three years). The policy we set up will contain an at arm’s length remuneration, to prevent disputes with tax authorities. The transfer pricing benchmark will be used to substantiate the transfer pricing policy applied
If you would like to discuss how we can be of service to you, please make an appointment for a free consultation by phone or fill in our contact form. We are looking forward to meeting you.