One of the key matters for preparing a benchmarking analysis is the comparability of underlying data. What if the data are not perfectly comparable? If that is the case, it may be necessary to apply comparability adjustments.
When comparability adjustment is a good thing?
The comparability adjustment seeks to increase the reliability of a benchmarking analysis. The idea is to achieve a greater degree of comparability between the transaction under review and transactions made by third parties.
As clarified by the Polish Ministry of Finance, comparability adjustments are possible when:
- they result in a higher degree of data comparability in controlled transaction using the appropriate transfer price verification method
- comparability differences will be quantifiable.
When an adjustment is impossible, a red light flashes
There may be situations when an adjustment proves unjustified as the following example:
Company X sells printer ink to a related party of Company Y in wholesale quantities. In order to compare the prices set in the transaction under review with those set by third parties, Company X uses a price list published by the printer ink manufacturer. Importantly, the price list features only retail prices used in transactions with individual customers.
In this example, the comparability adjustment is not appropriate. This is because the prices are set at different market levels within the value-added chain (comparison of retail and wholesale prices). In this case, differences between market levels in functional terms cannot be adjusted.
To better understand what to consider to assess the appropriateness of making a comparability adjustment, the key factors should be analyzed:
- significance (level) of differences due to which an adjustment is considered;
- the quality of data to be adjusted;
- the ability to secure a reliable means of making the adjustment.
Whenever reasonable adjustments to eliminate differences in comparability are not possible (e.g. different market level, etc.) or where the adjustment does not increase the reliability of the results, resampling or using a different transfer price verification method should be considered.
Taxpayers should bear in mind that the need to make numerous or significant adjustments may indicate that third parties are making transactions or conducting activities that are in fact not sufficiently comparable to the controlled activity/transaction. Thus, it should not be included in the benchmarking analysis.
Polish taxpayers must inform the tax authority of all details of TP adjustments
A novelty in the Polish special TP declaration (TP-R) is the obligation to state the impact of a comparability adjustment on the result of the benchmarking analysis. When a comparability adjustment (or adjustments) was made in the process of preparing the benchmarking analysis, taxpayers in the TP-R for 2022 will be required to state whether the comparability adjustment changed the result of the analysis by less or more than 30%.
Same old story – how to calculate it?
First concern is how to calculate the impact of adjustments on the analysis result. The OECD Guidelines or Polish regulations introduce no details and such calculations can be particularly complicated, especially where the analysis result is a range of arm’s length values rather than a single value. So, in most cases. This is where more questions pop up: (i) should the impact of the adjustment be calculated for individual observations? Should the maximum, average value of changes as a result of adjustments be given?, (ii) and what if there are a lot of observations and it is impossible to verify the impact for each of them?, (iii) is it then sufficient to calculate the impact for extreme values (min, max or first and third quartiles)?, (iv) should the analysis reports include two ranges of arm’s length values – before and after adjustments?
… but there are more doubts
The next doubt is related to the fact that under currently binding regulations, information on the impact of comparability adjustments on the results of the analysis is not a mandatory part of the benchmarking analysis. What if a taxpayer has an up-to-date benchmarking analysis, prepared in accordance with transfer pricing regulations, but without detailed information on the impact of adjustments on the result? After all, it is quite common that the TP-R for 2022 will report transactions whose arm’s length is verified by analyses prepared in previous years. Will the taxpayer be obliged to complete the analysis for the purposes of correct TP-R filing? And what about the analyses prepared by the group? Will it be necessary and possible (!) to calculate the impact of the comparability adjustment on the result? In such situations, is it a good and safe solution to select the third option: checking the item ‘Impossible to determine the impact of the adjustment on the result’ in the form?
So, it’s a good time now to review a benchmarking analysis to eliminate any potential risks associated with adjustments that materially alter the results.
If you wish to learn more – I will be more than happy to answer your questions.
Magdalena Dymkowska
Partner, MDDP
