Proposed Framework for Foreign Comparables Selection and Adjustment

Sébastien Gonnet, H.B.A. Steens, Christof Beuselinck, Matthias Petutschnig

Research output: Web publication or Non-textual formWeb publication or WebsiteProfessional


Our study provides tax administrations of emerging and developing countries and multinationals operating in these countries an economic framework for the determination of arm’s length and compliant transfer pricing arrangements. Our findings infer from economic modelling and empirical evidence that, in the absence of reliable domestic comparable companies (also called “comparables”), foreign comparables should not be rejected a priori, and that there are merits to using foreign comparables from countries with a similar country risk profile. Selecting comparables that are operating in countries geographically close to the country of incorporation of the tested party, even though appealing and widely used in practice, seems to be less helpful. Our results also suggest that using comparables from countries with a different (typically lower) risk profile necessitates country-risk adjustments. At a time when revenue mobilization is a key development priority and essential to finance investments in human capital and infrastructure, application of such framework should benefit tax administrations, then equipped with an economically sound approach to review transfer pricing arrangements of multinationals. With the proposed approach, multinationals should also benefit from more objectivity and increased reliance on economic arguments by tax administrations. An interesting consequence of our study is the suggestion that simplification in transfer pricing – for instance fixed returns for certain “baseline” activities, as recently suggested by the OECD - is not out of reach and that large datasets of comparables may well provide insightful proxies for an economically sound estimation. If such simplified measures are adopted at international levels, the inherent risks of operating in the developing countries will need to be accounted for, with for instance higher than average baseline profits in these countries.
We acknowledge that further analyses are welcome to confirm our preliminary findings. Nevertheless, the importance of the subject for worldwide transfer pricing practices convinces us to report these initial findings and to stress the importance of further research. We are committed to engage with interested stakeholders (for instance, international or regional organizations) to further enhance the contents and impact of the analyses.
Original languageEnglish
PublisherTPED - Transfer Pricing Economists for Development
Media of outputOnline
Publication statusPublished - 24 Dec 2019

Bibliographical note

pp. 1-22

Cite this