Intellectual Property- Impact of Transfer Pricing & Economic Substance

Intellectual Property - Impact of Transfer Pricing & Economic Substance

• What is comparability/ benchmarking search analysis?

Comparability/benchmarking search analysis is an important aspect of Transfer Pricing documentation to determine arm’s length price of controlled transactions. The objective of analysis is to evaluate that whether pricing of intra-group transactions are in line with market standards (independent third party transactions) or not to ensure no tax evasion.

• How to undertake comparability/benchmarking search analysis?

Comparability analysis can be undertaken to find either (1) internal comparable; or (2) external comparable, which are broadly similar to controlled transactions.

Under an internal comparability analysis, one needs to compare the transaction of taxpayer with related parties vis-à-vis unrelated parties. Generally, in the absence of internal comparability, one needs to adopt external comparability to find broadly similar external potential comparable (on licensed database) having regard to the nature of business/transactions of the controlled transactions. A benchmarking search can be performed on licensed database by applying relevant criteria such as financial, jurisdiction, industry / business, turnover criteria, related party threshold, etc. Subsequently, after screening of these filters, potential comparable companies can be identified. These globally recognised licensed databases has industry / business data of companies (listed as well as unlisted) of various jurisdictions.

• Which inter-company transactions can be benchmarked on licensed database?

Generally, benchmarking search on licensed database can be performed for most of the inter-company transactions entered amongst multinational group such as:

·       Traditional transactions- Purchase/sale of raw materials or finished goods.

                                        provision/availing of services, management/technical fees, etc.

·       Financial service transactions- Intra-group loans/guarantees ( including determination of credit rating of borrower ), etc.

·       Intangible property transactions- Royalty, franchisee, technical know-how, brand/trademark fees, etc.

Way forward:

Transfer Pricing topic has gained significant focus globally (including Middle East and Africa) in last decade wherein many countries have introduced Regulation. Moreover, tax authorities are aggressively undertaking Transfer Pricing audit / scrutiny with the aim of verifying tax evasion or increase in tax revenue of country. It is recommended to undertake fresh benchmarking search analysis to evaluate if pricing of intra-group transactions are aligned with market conditions. This would help them to justify intra-group transactions and mitigate potential risk of tax in future.