What are the permissible thresholds for cross-border transfer prices between affiliated, i.e. dependent, companies? And how can these transfer prices be manipulated to shift profits to low-tax jurisdictions? These are questions that (internationally active) tax consultants frequently encounter. Databases that offer data for benchmarks and profit level indicators provide valuable insights. We present a comprehensive overview of various providers.
Tax authorities often scrutinize the reasonableness of transfer prices. Consequently, they require documentation substantiating the appropriateness of the prices established (in accordance with the "arm's length principle").
The OECD and local tax authorities promulgate regulations governing transfer pricing determination. These regulations also encompass documentation requirements, which are subject to ongoing tightening. For companies, this translates into a persistent increase in reporting obligations.
Companies are legally obligated to prepare transfer pricing documentation. This documentation, which often relies on data exclusively available in databases, is crucial for demonstrating the appropriateness of transfer prices. The specific requirements for this documentation vary depending on the chosen transfer pricing method.
These documents are also known as benchmark analyses and must be submitted as part of group tax audits. The level of acceptance of these analyses by tax authorities can have significant tax implications. If the authorities reject the figures provided by companies, substantial back tax payments may result.
A key component of such documentation is the so-called "profit level indicator." This serves as the financial foundation for tax benchmark analyses and is therefore essential for their accuracy.
The figures in transfer pricing documentation, often derived from database data, frequently serve as the focal point for discussions with tax authorities. These figures directly impact the amount of tax payable in the respective jurisdiction. Companies naturally seek to minimize their tax burden, while tax authorities aim to maximize their tax revenue.
The negotiations between companies and tax authorities can be arduous, often characterized as "haggling," "horse-trading," or "bazaar."
Irrespective of whether the data is accepted by tax authorities, the taxable entity must fulfill its documentation obligations. This entails creating transfer pricing documentation that incorporates data from databases.
Failure to comply with these obligations precludes negotiations with tax authorities. However, negotiations may not be necessary; tax authorities may simply accept the data.
A swift and cost-effective approach to determining the requisite data and satisfying documentation requirements is to leverage the smartZebra database.
Moreover, other databases from diverse providers also contain benchmarks and profit level indicators.
These databases primarily differ in terms of pricing, usability, and the availability of data on private, i.e. non-listed, companies. The permissibility of using benchmarks derived from publicly traded and/or private companies hinges on two factors:
Major American providers offer the relevant valuation data as a secondary product. The extensive scope of their additional data offerings is reflected in their acquisition costs, which typically start at around €15,000:
Bloomberg, CapitalIQ, Refinitiv
Bureau van Dijk
D & B Hoovers
Creditreform
smartZebra
While established providers like Bloomberg, CapitalIQ, and Refinitiv remain the benchmark for comprehensive database solutions, more compact alternatives are offering new opportunities for tax consultants.
These alternatives are not only more cost-effective but also provide a targeted focus on the data essential for business valuations.
The user-friendly nature of these specialized databases empowers tax consultants to swiftly and efficiently generate the data necessary for transfer pricing documentation.
