Transfer pricing analyses aimed at demonstrating compliance with the arm’s-length principle for intragroup transactions often rely on external benchmarking analyses to determine market profitability ranges.
The goal of benchmarking is to identify comparable companies to the tested party, taking into account the specific transactions being analysed and the five so-called comparability factors:
The characteristics of goods and services;
Functional analysis;
Contractual terms;
Economic conditions; and
Business strategies.
Methods for selecting comparables
The OECD identifies two approaches for selecting comparables:
Additive approach – under this approach, comparables are selected (after verifying their compliance with comparability criteria) from entities identified by the company itself (typically by the administrative and commercial departments) or by the party conducting the benchmarking analysis (through consultation with trade associations and the collection of relevant data).
Deductive approach – this method involves selecting comparables by using commercial databases. Paragraph 3.42 of the OECD Guidelines states that the method begins by examining a broad list of companies operating in the same industry, performing similar functions, and exhibiting similar economic characteristics. The list is then refined using selection criteria and publicly available information (e.g., databases, websites, and competitor data). Typically, the deductive approach starts with a database search.
After identifying a potential set of comparables, a further qualitative analysis is required to refine the selection.
To filter out companies considered non-comparable to the tested party, the following steps are typically undertaken:
Analysis of business descriptions – the business activities of each potential comparable company, as listed in databases or obtained from the companies’ websites, are reviewed to assess comparability.
Analysis of company websites – information from the websites of potential comparables is gathered to obtain more detailed data on their activities, products, intercompany relationships, and general company profiles. Companies without online information are generally considered non-comparable.
Analysis of financial statements – the financial statements of potential comparables are examined to gather additional insights about the products/services provided, the functions performed, and any intercompany transactions.
This process helps narrow the sample to a reasonable number of comparable companies, enhancing the degree of comparability between them and the tested party.
Based on the available information, the reference sample is then further refined by eliminating:
Companies engaged in activities completely different from those of the tested party;
Companies producing or distributing goods that are not comparable to those of the tested party;
Companies for which there is insufficient information to assess comparability with the tested party; and
Companies belonging to multinational groups or otherwise not independent (even if they passed the independence criteria in the database screening).
The central focus of a benchmarking analysis is selecting the correct reference sample. This sample should include companies operating in the same sector as the tested party, at the same stage of the production process, and under similar operational conditions (e.g., companies with multiple clients versus a company with one exclusive client, or retailers with a few stores versus those with many). They should also produce or distribute comparable products (in terms of characteristics and volumes) to avoid cherry-picking.
Italian case law reinforcing accurate comparable selection
The recent ruling No. 454/1/2025 of September 29 2025 by the Tax Court of First Instance of Bergamo underlined the need for any transfer pricing adjustments based on external benchmarking analyses to be founded on a correct selection of comparables.
The Italian company (the appellant) contested the accuracy of the benchmarking analysis conducted by the tax authorities, claiming that not all comparability factors had been properly considered and that the sample of comparable companies was inadequate. Specifically, the appellant argued that the selected companies operated in different markets, had different organisational structures and fewer employees, and sometimes owned their own fleets, which did not correspond to the reality of the appellant company.
The appellant also noted that, after conducting the benchmarking analysis, the tax authorities set the profitability indicator in the third quartile rather than in the first quartile of the benchmarking analysis.
Consolidated case law has consistently emphasised the importance of properly selecting comparables to ensure compliance with the arm’s-length principle, particularly in the case of transactions between foreign affiliates. The Supreme Court, in its ruling No. 2853/2024 of January 31 2024, reiterated that an improper choice of comparables can compromise the entire transfer pricing determination process and invalidate tax assessments.
In response, the tax authorities emphasised the correct application of the transactional net margin method, which was not contested by the appellant. However, they pointed out that, during the tax settlement phase prior to litigation, the taxpayer had been offered the opportunity to review the panel of comparables, limiting the selection to six Italian companies more similar to the appellant. Despite this offer, the appellant chose not to accept it.
The judges upheld the appellant’s appeal, ruling that the selection of comparables by the tax authorities was illegitimate. They emphasised that, while the selected companies were European, their economic and organisational contexts were too different to be considered comparable to the appellant. The choice of a comparables panel that did not reflect the appellant’s business reality significantly impacted the transfer pricing determination and the profitability indicator, which had been set incorrectly.
Key takeaways
The above ruling underscores the importance of selecting appropriate comparables in transfer pricing analyses and reiterates the tax authorities’ obligation to provide adequate evidence of the correctness of transfer prices. Correctly applying transfer pricing rules and ensuring the accuracy of the benchmarking analysis are crucial to ensuring compliance with the arm’s-length principle and avoiding the issuance of tax assessments based on erroneous assumptions.
