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Removing Subjectivity from Transfer Pricing Benchmarking

With the OECD’s recommendation of Base Erosion and Profit Shifting Action 13 (BEPS Action 13), the transfer-pricing landscape evolves every day.

It’s been five years since BEPS Action 13 was introduced and transfer-pricing practitioners are still approaching benchmarking the same way they always have—diving into costly, time-intensive comparability searches that don’t always pan out, making subjective comparability judgment calls, and often failing to attract tax-authority buy-in.

It’s time to revamp traditional transfer-pricing benchmarking. Transfer-pricing audits are on the rise and unreliable comparables are an easy mark for tax authorities. The solution being artificial intelligence aimed to save time and money.

Subjective Judgment Calls

When it comes to transfer-pricing benchmarking, tax authorities want comparable companies based on facts and circumstances. True, in the past, tax authorities have not only allowed transfer-pricing experts to weigh in on which comparables should be included or rejected in a set, they’ve downright expected some judgement calls. But as the OECD has repeatedly pointed out, those speculations influence the arm’s-length range.

Technology Rescue: Enlisting transfer pricing technology means that software can sift through millions of companies from a transfer-pricing standpoint. Given that the software compares functionality, not business industries, you don’t have to make any judgment calls about comparability. The software has done it for you—based on facts and circumstances—in other words, objectively.

Comparables Just Do Not Exist

Tax authorities are increasingly demanding local comparables. Their goal is to construct an arm’s-length range based on actual market conditions. The problem is that perfectly comparable third-party companies don’t always exist in every jurisdiction, or at all.

To stay in compliance, MNEs’ invest money, time, and resources—only to come up with a small set of five to 10 loosely comparable companies.

Technology Rescue: Aside from sifting through millions of companies from a transfer-pricing point of view, software can also sort by jurisdiction. So, finding reliable local comparables is not a problem. It recognizes companies for functionality, producing a large, reliable transfer-pricing comparability set.

It’s Impossible to Keep Track of Country-Specific Benchmarking Regulations

Benchmarking regulations are different in almost every jurisdiction. It is close to impossible to keep track of the myriad transfer-pricing requirements around the world, but if you don’t—it’s a problem. Taxpayers who submit documentation that doesn’t adhere to local benchmarking requirements are risking an audit.

Technology Rescue: You can spend countless hours researching transfer-pricing benchmarking requirements around the world, or you can let technology give you those answers in a matter of seconds. AI-powered transfer-pricing software keeps track of country-specific benchmarking regulations. The software alerts you to all the requirements—information, criteria, documentation format—and covers all your operational jurisdictions.

We Don’t Have the Resources for Local Comparable Searches

Why are transfer-pricing compliance burdens are constantly growing, and tax departments and budget are constantly shrinking?

Technology Rescue: Transfer-pricing software solutions are especially advantageous to dwindling tax departments, because they handle the bulk of transfer pricing documentation strains at a lower cost.

AI-based solutions search fast, are less prone to errors, and they produce documentation that’s compliant in every jurisdiction. Plus, it stores documentation in a central, cloud-based location, so you can reference it the next year.

Want to learn more about transfer pricing compliance? Sign up for CrossBorder Solutions’ free Transfer Pricing University.