TP Challenges in the Absence of Comparable Information Summary of key issues.
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Transcript of TP Challenges in the Absence of Comparable Information Summary of key issues.
TP Challenges in the Absence of Comparable Information
Summary of key issues
Context• Availability of comparable data is identified as a
major (if not the major) challenge faced by the tax administrations and private sector
• Availability of data has long been a topic of concern in the field of transfer pricing, but “ring fenced” as developing country issue
• Recent events (BEPS focus, global focus on transfer pricing) have thrust this issue into the spotlight:– Tax and Development Forum; G20 mandated toolkit
The paper in a nutshell• Importance of comparable information to implement ALP:
theoretical underpinnings and practical requirements• The status quo in EECA: a dearth of comparables in
commercial databases• Why do we lack information? Market structure; Regulation;
Administrative limitations/non-compliance; Collection strategy• How do practitioners deal with lack of information? heavy
reliance on data from other geographic markets • What kind of guidance is available on using/adjusting
“foreign comparables”? –> Little• How much trust can we have in approaches promoted/used
in practice to adjust information? -> Little
The Challenge (In EECA)
• “Simply put, the application of a principle that relies on a comparison of the conditions in controlled transactions with the conditions in comparable uncontrolled transactions is extremely difficult, if not impossible, where the requisite information is not available or does not exist.”
Number of records with revenue and net profit data that are independent (2011)
Countries
≤ 10 Turkmenistan, Macedonia FYR, Kosovo, Kyrgyzstan, Albania, Georgia, Tajikistan, Armenia, Uzbekistan, Azerbaijan
10-1,000 Moldova, Belarus, Montenegro, Kazakhstan, Croatia1,000-5,000 Lithuania, Serbia, Bosnia & Herzegovina, Slovenia, Turkey5,000-10,000 Latvia, Hungary10,000-100,000 Ukraine, Slovakia, Estonia, Poland, Czech Republic, Bulgaria
100,000 + Romania, Russian Federation
Source: Analysis of BvD ORBIS Database (17 Dec 2013)
Understanding the (lack of) data• Factors impacting the availability of comparable
information in EECA: – Market structure– Regulatory framework– Administrative framework and compliance
behavior– Collation of information by database providers
Dealing with lack of data – possibilities/options
• Various different approaches discussed in literature/adopted in practice:– Modified selection criteria• Foreign comparables, different industries, different
functional profiles and lower ind. requirements– Use of alternative information sources• Internal rates of return, industry averages, secret
comparables and customs data– Administrative measures• Safe harbors, advance pricing agreements
– Legislative measures• Fixed margins (Brazil), 6th Method
How is it dealt with in practice?• Selected results of survey of over 50 transfer pricing
practitioners, covering 25 countries in the EECA region:How often do you face difficulties obtaining
information on domestic comparables?Approaches adopted/observed in absence of
information on domestic comparables?
Is there any guidance/law on use of foreign comparables?
Guidance?!• Selection: In Europe, wide recognition for regional
comparables following creation of single market conditions (Kroppen 2004); or sub-regional selection (Benelux, Scandinavia)
• Adjustments: No clear guidance, but multiple proposals– Buettner: use of differential in 10 year bond yield – Gonnet et al (2014)/Starkove et al (2014) Weighted
Average Cost of Capital (Bond yield (gov and corporate), Equity Risk Premium
– Baker McKenzie – propose use of Damodaran (2003) • Additional practical challenges: Accounting standards &
language
Using foreign comparable information - A valid solution?
• Basic assumption underlying country adjustments is higher (country) risk linked to higher returns.
• A number of studies look at firm performance and country specific drivers:– Hawawini et al (2004), Makino et al (2004), Goddard et al
(2009) estiblish relevance of country level determinants– Burstein and Godlzmidt (2011) find greater country effects
in emerging than in more developed economies• Confirms potential importance of country effects. • Any adjustment criteria should explain some of the variation
in observable firm performance.