The role of the comparability analysis in transfer pricing

What is the role of comparability analysis in transfer pricing and why do we conduct such analysis?

The purpose behind a comparability analysis in transfer pricing it is to obtain an in-depth understanding of the significant characteristics of a controlled transaction and the roles of the involved parties. This is needed to determine and substantiate the arm’s length remuneration of such a controlled transaction and to ensure that the terms and conditions of intra-group transactions reflect the terms and conditions established in comparable unrelated transactions.Comparability is the primary condition for assessing whether an intra-group transaction can be considered to be at arm’s length and the concept thereof is used in the selection of the most appropriate transfer pricing method, as well as in applying the selected method to arrive at an arm’s length pricing of financial indicator.

A comparability analysis is used to develop a comprehensive understanding of an accurately delineated intra-group transaction. Developing such an understanding can be characterised into two parts:

  • identifying the economically significant characteristics or “comparability factors” of the intra-group transaction; and
  • identifying the respective roles and responsibilities of each of the parties to the intra-group transaction.

Conclusions with respect to comparability rely on the analysis of the “comparability factors”, which can be categorised as follows:

  • the contractual terms of the transaction;
  • the functions performed, assets used and risks assumed by the parties involved;
  • the characteristics of the transferred goods or provided services;
  • the economic circumstances; and
  • the business strategies of the parties involved.

The comparability factors are essential for the accurate delineation of the intra-group transaction, and for the actual comparisons between the intra-group transactions and unrelated transactions to determine an arm’s length price for the intra-group transaction under review. It is to be noted that two transactions do not necessarily have to be identical to be considered comparable. However, the differences between the intra-group transaction and the unrelated transaction should not materially impact the arm’s length price or profit. Where such material differences exist, reasonably accurate adjustments should be made to eliminate this impact.

OECD's nine step process 

The OECD Guidelines propose the implementation of a standard 9 (nine) steps process to facilitate the performance of the analysis as follows:

  1. Determination of years to be covered
  2. Broad-based analysis of the taxpayer’s circumstances
  3. Review of the controlled transaction(s) under examination and the choice of the tested party
  4. Identification of internal comparables
  5. Identification of external comparables
  6. Selection of the transfer pricing method
  7. Identification of potential comparables
  8. Making comparability adjustments if necessary
  9. Interpretation and use of data collected, determination of the arm’s length remuneration


Some of these steps are easy to follow, merely needing an acknowledgement of what is being dealt with, whereas others require a substantial amount of analysis.

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