How the recession will have an impact on comparables selection and documentation
December 17, 2008
It is now clear to tax authorities and taxpayers, says Pamesh Sharma of Thomson Reuters, that the economic downturn will offer unique challenges to the arm’s-length standard and the continuing search for evidence to support expected profit levels by economic function.
Transfer pricing studies have historically applied profit margins based on the expected level of profits associated with the risks, intangibles and functions employed in carrying out certain business-related activities.
An economic downturn typically means that the availability of comparable data becomes greatly limited and as a result taxpayers will need to seek different approaches to support their pricing. This will include a greater reliance on market and industry analysis to support transfer prices and, due to the paucity of data, a greater reliance on alternative transfer pricing methods to prove arms-length compliance.
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