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Looking Where the Light Is

A colleague recently came to me with a question about where to find a specific type of data needed for a transfer pricing analysis. That got me to thinking about how dependent our work is on the type of data that we have available to us. And the issue of data availability helps to explain one of the great paradoxes of transfer pricing analyses: most transfer pricing studies actually say nothing about actual transfer prices.

The goal of a transfer pricing study is to ascertain whether the transfer prices applied to transactions between two related companies are consistent with the “arm’s length standard”; that is, whether the prices are consistent with what we would have observed if the two companies had been unrelated. In theory, therefore, one would think that a transfer pricing analysis should involve the identification of market (or “arm’s length”) prices against which to benchmark the transfer prices applied to transactions between related companies.

20163348_sYet in practice it is indeed quite rare to see such direct price comparisons in a transfer pricing analysis. Instead, most transfer pricing studies take a “profits-based” approach in which it is the overall profitability of a company that is examined in detail; actual transfer prices are often never even mentioned in our studies.

This is largely due to data constraints. Many transactions between related companies are transactions that we never actually observe between unrelated companies. And even if similar transactions do take place between unrelated companies, it’s typically impossible to obtain price data that’s detailed enough on transactions that are comparable enough to make direct comparisons.

So instead, we are forced to do what economists have always done: we look where the light is.

While we don’t have data on the specific prices that Company X obtained for selling its goods and services to customers, we do often have very good data on the revenue, costs, and profitability of Company X – particularly if Company X is a public company. And since we have good data on profitability, that’s where we typically focus our attention in a transfer pricing analysis. If the related companies that are transacting with each other each demonstrate profitability similar to what we observe among independent companies, that provides indirect evidence that those related companies were not using transfer prices to shift profits between them.

So it turns out that the data that we have available to us plays an enormous role in determining the methods and types of transfer pricing analyses we can do. It’s not a coincidence that transfer pricing economists end up spending a ton of money – tens or even hundreds of thousands of dollars per year – just to obtain good data. In transfer pricing, as in so many other types of economic studies, the data is the driver’s seat.

Cross-posted at the WTP Advisors blog.


Welcome to the website of MINA Economics. My name is Kash Mansori, and I’m an economist who has been thinking, reading, and writing about transfer pricing for over 15 years. My firm provides economic consulting services to clients around the world; we specialize in solving economic problems and providing analyses and documentation for transfer pricing, valuation, international supply chain management, and related business economics purposes.

In addition to performing directly client-related work, I also spend a lot of time keeping up with the field of transfer pricing more generally. While that’s an eye-glazing proposition to most sensible people, it so happens that I actually like this stuff and find it interesting.  And that’s why I thought it might be helpful for me share my understanding and perspective to interested readers through this blog.

My intention is to develop this blog into a useful resource for transfer pricing information and analysis for economists, transfer pricing practitioners, corporate management, and tax specialists.  Some of the information on here will about be things that I’ve come across or read (so you don’t have to), while other posts will be intended more for my colleagues in the consulting profession, as a way to help advance our understanding and ability to help solve the problems confronting many of our clients.

Content to be provided here will include:

  • News about significant policy developments related to transfer pricing and international taxation;
  • Summaries of and links to interesting articles written by transfer pricing professionals;
  • Occasional primers on various aspects of transfer pricing that the consumers of transfer pricing consulting services might find useful;
  • Analysis of trends, techniques, and other recent developments in the field;
  • And who knows what else…?

New posts should be available several times per month, so feel free to check back from time to time for the latest news and analysis.  And please note that feedback is encouraged; you’re welcome to comment on specific articles or posts, or to simply contact me directly with questions or suggestions.  I’ll even take requests, so if there’s an issue in transfer pricing that you would like me to explore in this blog, just let me know.  In the meantime… enjoy!