Transfer Pricing
Economic Analysis and Benchmarking
ALS prepares comparability studies with reliable, sector-specific data, supported by market intelligence tools and international databases. We determine arm's length margins, market prices and internal pricing policies aligned with applicable tax regulations.
What our economic analysis covers
We characterise the functional profile of each group entity: functions performed, risks assumed and assets employed. This foundation determines which valuation method is appropriate and which party should be the subject of the comparability analysis.
We assess which method — TNMM, CUP, Resale Price, Cost Plus or Profit Split — is most appropriate for each controlled transaction, justifying the choice in line with the OECD Guidelines and applicable regulations.
We use Orbis/Bureau van Dijk, Amadeus and other international databases to identify independent comparable companies, applying documented criteria covering activity, geography, size and ownership independence.
Where material differences exist between the tested party and the identified comparables, we apply technical adjustments — working capital, risk or cost structure — to strengthen the robustness of the analysis.
We calculate the interquartile range from the selected comparables, position the price or margin under analysis within that range and conclude on its compliance with the arm's length principle.
For intra-group service transactions — technology, management, financing, intangibles — we conduct specific sector analyses that justify the applied margin by reference to actual market transactions.
Functional analysis as the starting point
Before searching for comparables, it is essential to understand what each entity does within the group. A rigorous functional analysis determines the tested party's profile, delimits the risks it assumes and establishes the economic framework on which the entire comparability study is built.
Functional profile and tested party selection
The choice of which entity to test is not arbitrary: it should fall on the least complex party to the transaction or the one for which the most reliable comparables are available. An incorrect choice undermines the analysis from the outset.
Net-level financial indicator
The TNMM — the most widely used method in practice — requires selecting the financial indicator best suited to the function under analysis. Net margin on sales, return on costs or return on assets each carry distinct implications depending on the tested party's activity.
Documented and auditable search criteria
Every decision in the comparable selection process — activity code, independence filters, size thresholds, time horizon — is documented so that any tax authority can reproduce the search and verify its internal consistency.
From the arm's length range to pricing policy
The result of a comparability study is not just a number: it is the foundation on which the group's transfer pricing policy is built. Defining appropriate reference margins and reviewing their continued validity on a regular basis is an integral part of the work we carry out.
Range determination and useful life
Under the OECD Guidelines, the arm's length range may be maintained for three years in conditions of sector stability, with the comparables' financial data updated annually. When conditions change materially, the range must be reviewed without delay.
Internal pricing policies aligned with the market
We translate the findings of the economic analysis into operational intra-group pricing policies: reference margins by function, criteria for adjusting deviations and review procedures that the group's tax function can apply consistently across entities.
Internal comparables where they exist
When an entity undertakes similar transactions with independent parties, internal comparables offer the greatest technical strength. We identify and prioritise them over external comparables, supporting their use with appropriate documentation.
How we prepare a comparability study
Functional analysis and method selection
We characterise the profile of each entity, identify the tested party and select the most appropriate valuation method for the controlled transaction, with express justification in line with the OECD Guidelines.
Systematic database search
We run the search in Orbis/Amadeus with documented criteria — NACE code, geographic scope, independence threshold, size and availability of financial data — recording every methodological decision taken.
Qualitative review and final selection
We manually examine each candidate company to verify that its primary activity is genuinely comparable. We document the reasons for excluding each rejected company, leaving the entire process fully traceable.
Range calculation, adjustments and conclusion
We calculate the interquartile range, apply any necessary comparability adjustments, position the price or margin under analysis and conclude on its conformity with the arm's length principle.
FAQs
Frequently asked questions about economic analysis and benchmarking
What is the difference between the TNMM and the CUP method?
The CUP method directly compares prices of comparable transactions and is the most precise approach when reliable direct comparables exist — which is relatively uncommon in intra-group dealings. The TNMM analyses net profitability indicators of comparable companies and is more robust when market prices are not directly observable, which is the typical situation in practice.
How often should the arm's length range be updated?
The OECD Guidelines allow the comparable selection to be maintained for three years if the sector's economic environment is stable, but the financial data of those comparables must be incorporated annually. When there are material changes in the group's activity, in an entity's functional profile or in sector conditions, the range must be reviewed immediately.
Can the tax authority reject the selected comparables and propose alternatives?
Yes. The tax authority may challenge the comparables used and propose alternatives if it considers they do not meet comparability requirements. The best defence in this situation is thorough documentation of every selection and exclusion criterion: when the process is well-documented, any alternative proposal is difficult to sustain without introducing methodological inconsistencies.
Is it valid to use comparables from other countries?
When the local market does not offer a sufficient number of comparable companies, expanding the sample to a European or pan-regional level is a widely accepted and common practice. The key lies in demonstrating that market conditions are sufficiently similar and in documenting the geographic selection criteria applied.
What happens if the entity's margin falls outside the interquartile range?
When the margin or price under analysis falls outside the interquartile range, the tax authority may propose an adjustment to the median. Tax regulations allow the taxpayer to argue why a point in the range other than the median better reflects the specific circumstances of the transaction, but that argument must be technically grounded from the outset of the study.
When is the Profit Split method used instead of the TNMM?
The Profit Split method is appropriate when both parties to the transaction make unique and valuable contributions — proprietary intangibles, significant risks assumed on both sides — that make a one-sided analysis impossible. It is the most demanding method in terms of information and analytical work, but also the most appropriate for highly integrated functional structures.
ALS Transfer Pricing
We prepare technically sound comparability studies aligned with the OECD Guidelines. Tell us about your case.