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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: making adjustments to potential comparables

Adjusting for potential comparables

The OECD Transfer Pricing Guidelines are based on a fundamental principle - that transactions between connected parties should be priced in accordance with the arm’s length standard and that the key to establishing the arm’s length price is a comparison with transactions between independent parties (see INTM412040).

The Guidelines recognise that slight differences between companies can be adjusted for on a reasonably accurate basis. However, it is unlikely that significant differences can be taken into account in a meaningful manner.

Case teams may need to consider adjustments made in transfer pricing reports and may need to make adjustments to comparables they are putting forward as an alternative.

Some points to bear in mind about adjustments:

  • Do not use unsuitable comparables in the first place. However many adjustments are made, it won’t be possible to turn a marketing consultancy into a suitable comparable for a brewing business.
  • The information available to determine adjustments is going to be limited. Commercial databases provide only the information that is publicly available. Little will be found in the way of breakdown of profit and loss entries for example.
  • Keep adjustments as simple as possible. If the case team thinks that a detailed economic formula is needed, using multiple variables, then it’s very likely trying to do too much. Similarly, teams should be sceptical of large numbers of very detailed adjustments; it may well be found that the final adjusted comparables bear little resemblance to the starting point.
  • Adjustments can only be taken so far before any comparison is rendered meaningless. Any exercise where the adjustment or series of adjustments significantly alters the range of prices or results is liable to be flawed.
  • Consider carefully any adjustments that seek to turn independent comparable transactions or company results into a hybrid which would probably not exist the commercial world.
  • Some adjustments will be based on balance sheet figures, for example stock and trade debtors. These figures are snapshots and may not be representative for the whole year, particularly if the trade is subject to seasonal variations.
  • It is difficult to compare cases on the basis of capital employed as this presupposes that the tested party has a capital structure that would be found at arm’s length. If the tested party is part of a group this is a false premise and making adjustments will be difficult. It is easier to make adjustments when comparing return on assets.

The OECD Guidelines do not specify what sort of adjustments should be made, or how they should be calculated. Some of the more common adjustments that might encountered are

  • Stock/cost of sales.
  • Trade debtors/sales.
  • Costs relating to a particular function that is not carried out by some of the comparables or the tested party.