Study On Comparability Analysis Within The Transfer Pricing Adjustment

In order to prevent multinational enterprises from avoiding taxation by manipulation of transfer pricing,tax administrations in various tax jurisdictions usually apply arm's length principle as a benchmark to adjust the controlled transactions to arm's length level.Application of the arm's length principle is generally based on a comparison of the conditions in a controlled transaction with the conditions in transactions between independent enterprises.To be comparable means that none of the differences(if any) between the situations being compared could materially affect the conditions being examined in the methodology(e.g.price or margin),or that reasonably accurate adjustments can be made to eliminate the effect of any such differences.In addition to the preface and conclusion,this paper is divided into three chapters:Chapter 1 focus on the importance or comparability in transfer pricing adjustment.Comparability plays an important role in the application of the arm's length principle and the best method rule.In order to establish the degree of actual comparability between the controlled transactions and uncontrolled transactions,it is necessary to compare attributes of the transactions or enterprises that would affect conditions in arm's length dealings,including characteristics of property or services, functions and risks borne,contractual terms,economic circumstances and business strategies.Chapter 2 pays attention to identifying reliable information on comparables, because the comparison of the conditions in a controlled transaction with those in independent transactions demands a substantial amount of data.Comparables can be divided into internal comparables and external comparables.A general preference for internal comparables(where they exist and are reliable enough) over external ones is universally accepted as internal comparables are likely to have a more direct and closer relationship to the transaction under reviewChapter 3 demonstrates the comparability analysis of each transfer pricing method so as to select the most appropriate method.The relative reliability of a method based on the results of transactions between unrelated parties depends on the degree of comparability between the controlled transaction or taxpayers and the uncontrolled comparables,taking into account the factors described above(factors determining comparability),and after making adjustment for material differences.Chapter 4 points out the shortages of China laws and regulations in relation to comparability analysis after an overview of the development of the aforesaid.And advice on how to improve the comparability mechanism in China is provided with reference to the advanced experience of other countries in legislation and international practice.