A comparability analysis is the process used in transfer pricing to test whether the terms of the intercompany transaction under review are consistent with those observed in comparable or related transactions. It sits at the heart of the arm's length principle and follows the framework set out in the OECD Transfer Pricing Guidelines.

A comparability analysis consists of two main parts:

• Determining the commercial and financial relationships between related parties involved in the transaction under review; and

• Comparing these intercompany transactions with similar transactions conducted between independent third parties.

In applying this analysis, a 9-step comparability process is followed. The process is not always linear, and steps may be repeated as needed to identify appropriate comparable transactions.

The 9-step comparability process

1. Determine the years to be covered

Specifies the year from which transfer pricing arrangements are applied.

2. Conduct a broad-based analysis of the taxpayers circumstances

Reviews the competition, industry, economic, and regulatory factors affecting the taxpayer and their operating environment.

3. Perform a functional analysis

Examines the controlled transactions to identify the tested party, the most appropriate transfer pricing method, the financial indicator (for profit methods), and relevant comparability factors.

4. Identify internal comparables

Where available, internal comparables are identified as these provide direct benchmarks.

5. Determine available sources of information of external comparables

Commercial databases are used, providing company-filed transaction data in a format suitable for statistical analysis.

6. Select the transfer pricing method

The most appropriate method is chosen, based on the characteristics of the entity and the specific transaction under review.

7. Identify potential comparables

A benchmarking study is undertaken, initially considering entities with similar economic features sourced from commercial databases. The reliability and comparability of the data inform the final selection of comparable transactions.

8. Make comparability adjustments if necessary

Adjustments may be made to comparables to enhance the accuracy and reliability of the presented data.

9. Interpret the data and determine the arm’s length remuneration

The final step involves reviewing and interpreting the comparables to establish an arm’s length price.

How we can help

A comparability analysis identifies suitable transactions to determine arm’s length pricing. Our team draws on deep transfer pricing experience to create compliant, defensible policies for your business. If you’d like to speak to our team, please get in touch by filling out the form below.