Such information includes not only details on comparable transactions from previous years, but also information on economic and market changes that may have occurred between those previous years and the year of the controlled transaction. In effect, independent parties in comparable circumstances would not base their pricing decision on historical data alone.
Strategies to carry out a comparability analysis
Conducting a comparability analysis and searching for comparable transactions (or subjects) is more challenging during periods of prolonged economic and financial turbulence due to the absence of suitable comparables and due to the two-year lag that exists between the end of the fiscal year and the time when the financial data of multinational companies is publicly available on the databases.
Thus, companies may adopt the following strategies when identifying comparables in order to make the comparability analysis consistent with changing economic conditions:
- Including loss-making companies in the set of comparables to determine the true arm’s-length price. The elimination of loss-making companies may not be appropriate in periods of recession and crisis as they do reflect the actual market conditions;
- Choice of an appropriate time period – the application of a time period of three years before the tax year under review, which is conventionally used for the selection of the comparables, may not be appropriate during periods of downturn. In case of a tax audit related to the tax year 2020, the use of the comparables data related to the time period 2017-2019 could not be correct since such years were not impacted by COVID-19. Alternatively, it could be used the data of comparables referring to previous recessionary periods or it is necessary to consider specific adjustments to the search strategy. The application of such approaches may not be straightforward due to the lack of available data or inappropriate because the previous period of downturn may be distant in time and/or not comparable due to specific economic circumstances;
- Choice of reference markets – the economic recession may have a global impact as well as being limited to some countries, which implies the need to carefully assess the choice of the country in which the comparables operate;
- Make specific adjustments to the financial data of comparables to take into account of the actual economic circumstances.
It should be emphasised that in such contexts it is inevitable that the assessment of compliance with the arm’s-length principle conducted by tax authorities ex-post differs from the analysis and results conducted by the taxpayer at the time of the transaction. Therefore, tax authorities should not employ information that was not available to the taxpayer at the time of the transactions to construct the TP analysis.
In such context, it is necessary to prepare proper TP documentation, which could support any deviation from arm’s-length results due to the impact of COVID-19 as well as any change in the value chain and TP policies applied.
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