in association with: External Comparables Prof D N Erasmus

Introduction  The functional analysis and comparability analysis is the most detailed part of TP, and we would have to go through the following steps:  Step 1: Identify entities that are related and deal cross-border  Step 2: Identify types of transactions between these entities (for instance interest, mgt services, professional fees, purchases of goods etc)  Step 3: Do a functional analysis- identify for each type of transactions the following:  - functions (what functions, valued add and responsibilities reside with each of the two parties in the transaction  - risks (which risks each of the two parties take)  - assets (what assets are involved in transaction and who of the two owns it)  Step 4: What are the current profit margins for each type of transaction  Step 5: Comparability Analysis: look for internal comparables: do the parties involved in identified transactions also do the same type of transactions with third parties?  Step 6: If no internal comparables exist, look for external comparables in a database, such as TP Catalyst or Royaltystat. The problem is a result from a database will not mean anything if internal comparables exist, which give a different result.

OECD TP Guidelines  External comparables and sources of information A.4.3  Databases A  Foreign source or non-domestic comparables A  Information undisclosed to taxpayers A.4.3.3

 Comparability analysis should encourage quality over quantity (standard processes). In particular:  The use of commercial databases may give rise to concerns about the reliability of the analysis compared to other sources of information, such as internal comparables  Use of commercial databases should not encourage quantity over quality.

 i.e. comparables collected by tax administrations from audits, tax returns etc. unavailable for taxpayers  Issues of transparency, reliability and fairness  It would be unfair to apply a transfer pricing method on the basis of such (secret) data unless  the tax administration was able, within the limits of its domestic confidentiality requirements, to disclose such data to the taxpayer so that there would be an adequate opportunity for the taxpayer to defend its own position and to safeguard effective judicial control by the courts.  Secret comparables may, however, be used in Competent Authority (MAP) Procedures to eliminate double taxation

 Non-domestic comparables should not be automatically rejected  Examine whether non-domestic comparables are reasonably reliable on a case-by-case basis:  Five comparability factors  Careful consideration of market differences and accounting standards, and of whether reasonably reliable comparability adjustments can be made where needed