The provisions on benchmarking as a mandatory element of local transfer pricing documentation have been in force since 2017. Despite this, you can still come across analyses containing significant substantive and at the same time basic errors. Today in the series “On benchmarking in transfer pricing”, we will discuss just that.

While verifying comparative analyses recently, we came across benchmarks in which comparable entities were selected inconsistently with the subject of the analyzed transaction. Among the final sample of comparable entities were entities with a profile inconsistent with the activity conducted as part of the verified controlled transaction.

Where do such discrepancies come from? Perhaps the preparer wrongly identified the subject of the transaction (production of raw materials for food production) with the core activity of the analyzed entity according to its PKD (production of food products). In another example, in the analysis concerning the production of finished products, among the entities considered comparable were those that obtained approx. 50% of sales revenue from commercial activity. Perhaps the person preparing the report did not verify the compliance of the actual activity of these entities with the PKD code under which they were registered.

A separate category of benchmarks is analyses for financial transactions – not only due to their degree of complexity, but also due to difficulties in obtaining the appropriate data. Perhaps this is the reason for the still common practice of referring, for example, in analyses concerning loans to interest rate statistics published by the National Bank of Poland, as comparative data. Meanwhile, these are data with a very high degree of aggregation, which makes it impossible to precisely relate them to the conditions of specific transactions concerning financing between related entities. However, if we decide to use the NBP data, it is worth considering whether the effect of such a comparison is not a comparative analysis, but a compliance analysis – due to the use of data that does not meet the comparability criteria.

Finally, the issue of updating the benchmark in connection with the expiry of the 3-year statutory “validity period”. This seems quite simple, provided that after 3 years from the preparation of the analysis, the person preparing the report does not decide, for example, to limit themselves solely to updating data from the reports of a group of entities considered comparable in the original analysis. This group may include entities that have changed their industry or profile in the meantime, entered the structures of capital groups, or ceased operations. Changes in the transaction itself (such as a significant increase in the volume of turnover) may also require modification of previously applied comparability criteria. Therefore, updating always requires re-searching for data based on verified criteria.

Do you have any doubts as to whether your comparative analyses are being prepared correctly? Please contact us: infocredit@infocredit.pl .