Carrying out Comparability analysis is at the core of the application of the arm’s length principle (APL). Applying the arm’s length principle is based on the comparison of the conditions in a controlled transaction between associate enterprise with the conditions that would have been made if the parties were independent and undertaking a comparable (similar) transaction under comparable (similar) circumstances.

A controlled transaction between associated enterprise and an uncontrolled transaction between independent enterprisers can be treated as comparable (similar) if the economically relevant characteristics (Comparability factors) of the two transactions and the circumstances surrounding them are adequately similar to provide a reliable measure of an arm’s length result. However, in the real world, two transactions are unlikely to be similar and perfect comparable are hard to come by. Businesses, therefore, must use a practical approach in establishing the degree of comparability between controlled and uncontrolled transactions.

We can determine this degree of comparability on the basis of a number of attributes of the transactions or parties that could materially affect prices or profits and the adjustment that can be made to account for differences. These attributes are usually referred to as the five comparability factors, which include contractual terms of the transaction, functional analysis, economic circumstances, business strategies and characteristics of Property or services. In this blog, we will explain to you “characteristics of property or services”. Read ahead for more insights:

The rationale for characteristics of property or services

Differences in specific characteristics of property or services often influence the differences in their value in the open market. Therefore, comparing these features is essential to outline the transaction and in determining the comparability of controlled and uncontrolled transactions. Consult with Transfer Pricing consultants in Dubai for further insights.

Important Characteristics to Consider

Before conducting the functional analysis, there is the critical step of analyzing the relevant characteristics of the controlled transaction or taxpayer’s business. Property, whether tangible or intangible, as well as services may have different characteristics resulting in a difference in their open market value. Therefore, it is critical that these differences must be accounted for and considered in any comparability analysis of controlled and uncontrolled transactions.

Characteristics that may be important to consider are:

1. In the case of tangible property, the physical features, quality, reliability and availability of volume and supply
2. In the case of services, the nature and extent of such services
3. In the case of intangible property, the form of the transaction (e.g. licensing or sale) and the type and form of property, duration and degree of protection and anticipated benefits from the use of the property.

Comparability Factor & Transfer Pricing Methods

Comparability analysis is crucial for selecting the most appropriate transfer pricing method. Let us look at the requirement of comparability of property or services in various transfer pricing methods. The requirement for comparability of property or services is strictest for the comparable uncontrolled price (CUP) method. Under the CUP method, any material difference in the characteristics of property or services will have an impact on the price and would require an appropriate adjustment to be considered. Under the resale price method and cost plus method, some differences in the characteristics of property or services are less likely to have a material effect on the gross profit margin or mark-up on costs.

Differences in the characteristics of property or services are also less sensitive in the case of transactional profit methods than in the case of traditional transaction methods.  This does not mean that the question of comparability in characteristics of property or services can be ignored when applying transactional profit methods, because it may be that product differences entail or reflect different functions performed, assets used and/or risks assumed by the tested party. In practice, it has been observed that comparability analyses for methods based on gross or net profit indicators often put more emphasis on functional similarities than on product similarities.

Hire the Best Transfer Pricing Advisors in Dubai, UAE

Transfer pricing in the UAE can be complex for businesses, especially the factors of comparability analysis. In order to ensure the prices are at arm’s length range as per the OECD Guidelines, transfer pricing experts in Dubai can help you. Corporate tax experts at Tax Gian are your best option to simplify the regulations of transfer pricing.

Tax Gian is a brand of Jitendra Tax Consultants (JTC), which is one of the leading providers of transfer pricing services in Dubai, UAE. We have over 21 years of experience and our expertise can help you simplify the complex provisions of the UAE corporate tax law. Through a diverse range of services, we can help companies set up transfer pricing structures, show them how to shift from one transfer pricing structure to another, and how to transfer intangibles between countries. You can learn more about how we can help your company with transfer pricing by scheduling meetings with our highly qualified transfer pricing consultants in Dubai, UAE.