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Benchmark in the practice of transfer pricing

| Wrote: László Killik
Benchmark in the practice of transfer pricing. The transfer pricing practice that companies determine the market price range on the basis of data obtained from different database providing services has become increasingly common all over the world.
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Benchmark in the practice of transfer pricing

The transfer pricing practice that companies determine the market price range on the basis of data obtained from different database providing services has become increasingly common all over the world.


The question of transfer pricing is an everyday problem for all businesses. The system of corporate income tax has caused serious imbalances around the world; therefore OECD started to draw up new guidelines. Only years are left for offshore companies and different business structures established to minimize tax.

Transfer pricing documentation is made only and clearly for tax authorities, in which businesses seek to show that the prices they use with their related parties can stand firm in the market as well. For this matter it seems to be a comfortable and safe solution to refer to data provided by a third party, so nowadays it is hard to imagine a transfer pricing documentation which does not include such a database query. Some data providers pursue such an aggressive marketing strategy that even the tax authorities are convinced that data obtained from them are the sole authentic sources of market prices.

A comparison like this is based on such major assumptions like the labor force in each country carries out their tasks with the same efficiency, the economic and legal environment is the same, the management can create the same creative, motivating or dictatorial environment. And the most important thing is that products and services are produced and provided in the same quality and quantity in each country. If we pondered on any of these questions during an assignment, it is almost certain that benchmark will not be a suitable method for determining the market price range.

In reality, most of the time the situation is exactly that affiliated companies meet unique needs; in many cases no comparable reference value can be found. Or in other cases, the same service or product is sold to third parties as well, so it is much more effective to compare prices with these values when determining the market price.

In recent years further important and serious transactions have required additional consideration, for which it is difficult to find suitable benchmark values. Among them the most relevant issues are the royalties, brand names and licenses. It is no coincidence that today’s most favorite tax scandals have burst out around IT companies which did nothing but designed their business structure in a way that each activity is subject to tax in the country where that activity is not taxable or receive such tax reliefs by which significant tax advantages can be achieved.

Tax authorities and the governments of individual countries have recognized the potential risks of corporate taxation, so they expect the OECD’s responses and guidelines under severe pressure and within a short period of time. It cannot be ruled out either that the double taxation agreements previously concluded will be negotiated again by the individual countries. The possibility of multilateral conventions (conventions between several countries) has seriously been raised instead of the previous bilateral conventions (double taxation avoidance agreements) to eliminate taxation disparities. However, I think the possibility of the latter is almost inconceivable.

László Killik

tax expert


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