In June 2013, the G8 states pointed out that the shortcomings of available data on comparable transactions is a significant issue, especially in developing countries, affecting the ability of tax administrations to make relevant comparisons across jurisdictions and thus ultimately affecting the effective application of transfer pricing rules. In the light of these issues, the G8 asked the OECD to identify possible solutions.
Challenges faced by developing countries
A number of factors make it difficult for developing countries to effectively apply transfer pricing methods based on comparables. This can make it hard for taxpayers to comply with transfer pricing rules. In general, information on comparable prices is hard to obtain, in both OECD and non-OECD countries. The main sources for comparable data are the various electronic databases that are generally used to obtain financial information on companies that carry out comparable transactions.
The downside of the electronic databases is that although they provide quite a large amount of financial data, the available information on companies operating in developing countries is scarce. This is due to certain conditions that exist in developing countries, such as the low number of large independent companies. Even when these do exist it is hard to obtain access to their financial information.
These deficiencies in accessing and using reliable comparable data are a significant problem for developing countries, because they deprive their governments of tax revenues, making these economies less attractive for investment.
The lack of available information also makes it more difficult to settle transfer pricing disputes. Settlement typically involves negotiation and compromise, and the success of this process depends on the existence of reliable data on comparables as well as on the skills, experience and governance framework in place. If these conditions are not met, the time required for settlement may increase and more simplistic approaches are likely to be adopted.
Possible approaches to tackle the lack of data
The paper issued by the OECD sets out a set of possible approaches to tackle the lack of data comparables in developing countries, including:
• Expanding access for stakeholders to data sources for comparables.
• More effective use of data sources to obtain comparable data.
• Approaches to reduce reliance on direct comparables.
• Advance pricing agreements and mutual agreement proceedings.
Figure 1. Possible approaches to tackle the lack of comparables
Expanding access to data sources for comparables
The proposed measures to expand access to data sources for comparables, include the provision of financial support by donors to fund access to databases, as well as the introduction of mandatory filing of statutory accounts for all companies.
More effective use of data sources for comparables
Another possible step could be the use of data sources in a more efficient way, by broadening the search for comparables to uncontrolled transactions in the same industry, but in other geographical markets. Additional guidance could also be developed on when and how to make country adjustments, as well as on identifying and selecting suitable foreign comparables, by looking at other markets where reliable data may exist. Exchanges of experience between countries could also be beneficial.
Approaches to reducing reliance on direct comparables
The paper provides different approaches on how to reduce reliance on direct comparables, such as the use of the Profit Split Method, the application of economic analysis or value-chain analysis. It also aims to encourage the use of similar transactions that might provide reasonable alternatives for accomplishing business objectives.
Advance Pricing Agreements and Mutual Agreement Proceedings
The OECD has also proposed the application of more Advanced Pricing Agreements and Mutual Agreement Proceedings (MAPs), which would require a review of country approaches to APAs, as well as of the procedures used to resolve transfer pricing disputes.
The solutions, which have been identified to address the difficulties in determining transfer prices in developing countries, faced by a lack of reliable comparables, cover a broad range of possible actions and need to be adjusted according to each country’s specific needs as well as the resources available for implementation.