Transfer Pricing

4. Comparability Analysis

4.1. Overview

Basic Problem. There is an international consensus that cross-border group profits should be divided up between group companies according to the separate entity approach. From this consensus follows that transactions between group companies should, for tax purposes, be determined by the arm’s length principle (see Article 9 (1) OECD-MTC, and Article 9 (1) UN-Model). To calculate arm’s length prices, it is necessary to verify the group transactions, i. e. the sales, services, financing etc. and the associated conditions (functional analysis). These factors shall be compared with those of independent enterprises that perform (ideally) the same transactions under the same conditions. The comparison is called comparability analysis, which is the core of the application of the arm’s length principle. Under the analysis two elements must be distinguished: (1) The factors that must be compared (comparability factors) and (2) the process of identifying comparables (comparability analysis). The OECD’s, the UN’s and the German rules on comparability correspond mainly in this regard. Furthermore, in connection with comparability, the treatment of ranges ...