As consultants and corporations navigate the base erosion profit shifting (BEPS) global tax environment, the availability and source of accurate data has been called into question. In fact, the January OECD Discussion Draft: A Toolkit for Addressing Difficulties in Accessing Comparable Data for Transfer Pricing Analyses (“OECD Toolkit”) stated,
“With respect to commercial databases, many developing countries report two core challenges: access and limited data coverage.” (OECD, January 2017)
Available Agreements are Not All U.S.-Centric
According to ktMINE data, nearly 80% of publicly-available agreements include territories for regions outside of the United States. This dispels the misconception that global market information is unavailable. In fact, a majority of agreements are written to be global in nature. Further, our research shows that publicly-disclosed contracts are available for non-U.S. companies in both the public and private sector.
Agreements Are Valuable for More than Royalty Rates
Typically, agreement databases only contain agreements with variable payments. But, this is only a small portion of available comparable data for transfer pricing. By limiting searches to only un-redacted agreements containing royalty rates, professionals are potentially missing out on key intercompany data around transaction structures.
The OECD Toolkit states,
“It is important to emphasise that comparability analyses are not always primarily focused on the actual price of the transaction. In many instances, transfer pricing rules operate to consider whether a transaction has occurred at all, or has occurred in a way that is substantively different from that which is described in contracts or documentation; in ways that are substantively different from those which would occur at arm’s length; or are not commercially rational.”
This section emphasizes not only the need for thorough documentation of the transaction with a contract, but also that the transaction not be substantively different from those occurring at arm’s length. In essence, highlighting the need for thorough intercompany data. It also takes the stance that price is not the primary importance of the analysis.
Unfortunately, many practitioners rely on databases that provide less than 20% of available comparable data for transfer pricing in order to support their analyses. As time goes on, research into an expanded data set will not only become the norm, but the requirement. Professionals will no longer be able to rely solely on royalty rates and will have to seek additional avenues of information.
Agreements Are Relevant Beyond Benchmarking Intangibles
Through our experience, the misconception regarding the availability of data (intercompany data or otherwise) can ultimately be traced back to a general lack of knowledge surrounding exactly what data is available and what it can ultimately be used to accomplish.
Many practitioners rely on the Transactional Net Margin Method/Comparable Profits Method for the majority of their non-intangible transactions. While not incorrect, failing to take into account additional sources of data will become a real issue moving forward. A closer look at available agreement data quickly reveals how it can also be used to benchmark distribution, financial, sales, procurement, and various other services transactions.
In the absence of royalty rate information, the following agreement types can also provide valuable insights:
- Toll/Contract Manufacturing
- Cost Sharing
- Joint Development
- Sales Agent
- Buying Agent
- R&D Services
- Management Services
- Back Office Services
- Procurement Services
- Distribution
- Placement Agent
- Plan of Merger
- Supply
- Settlement
- Software
- Reseller
- Financial Services
- Cross License
- Guaranty
- Credit or Loan
- Asset Purchase
As regulations change, falling back on old habits will no longer be sufficient. Assuming this information isn’t available or doesn’t exist is a mistake. One that could cause future analyses to be called into question.
Clients Aren’t Always the Best Source for Potential Internal CUP/CUTs
While clients are the best starting point to look for internal comparables, in some cases they do not have direct access to the most important intercompany data. Further, the intangibles list they provide isn’t necessarily exhaustive. Due to a fundamental lack of understanding regarding transfer pricing throughout a company, even if the tax department reaches out to other departments, they may not receive the correct information.
Luckily, this dilemma can be bypassed by conducting due diligence through the use of third-party databases. This often reveals information tax departments haven’t even seen, and in many cases can support intercompany transactions.
For more information on this topic, view ktMINE’s response to the OECD discussion draft.