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HMRC internal manual

International Manual

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HM Revenue & Customs
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Transfer pricing operational guidance: Evidence gathering: Searching for comparables: internal comparables

Check for internal comparables

The best source of comparables can be the business itself, where a comparable transaction may exist between one party to the controlled transaction and an independent party (“internal comparable”). A large group will have contracts and trading relationships with many customers, suppliers, contractors, etc. Case teams should compare the prices, terms and conditions of transactions with affiliates with the prices, terms and conditions of transactions with independents. See the OECD Transfer Pricing Guidelines at paragraph 3.24 onwards.

A search for internal comparables is sometimes overlooked by businesses when they are considering their transfer pricing policy and compiling documentation to demonstrate that the pricing is at arm’s length. If the transfer pricing documentation makes no mention of internal comparables, case teams should establish what work has actually been done to find out if there are any. While a ‘back to the drawing board’ approach should be avoided, this might be necessary when this potential source of comparables has not been considered. It is important to ensure that the best available comparables are being considered.

Where a group has considered but rejected internal comparables, case teams will need to examine carefully why transactions have been discarded as not being similar enough.

Teams may need to consider whether the work carried out has been thorough enough. A search for internal comparables can sometimes be a daunting task for a business if it has a very large number of potentially comparable transactions. In such cases teams should try to agree with the business a way for them to narrow down the search, for example by specifying the significant transactions more precisely or by breaking them down.

It may be that some transactions have been discarded because they are not identical. Remember adjustments can be made in some cases. Even with adjustments, internal comparables are likely to provide better evidence than the net margins of other third party companies.

Internal comparables can also give useful information about the terms of transactions and likely rewards. Examples may be found of transactions with third parties which feature

  • contracts for distributors or commission agents which are based on turnover generated;
  • contracts for manufacturing which contain incentives for quality and production times;
  • and contracts for R & D which give the other party rights to royalty payments in the event that their work ultimately results in new products.

The facts might lead case teams to conclude that similar transactions with affiliates should be on the same terms.