Benchmarking Study

An essential element of transfer pricing documentation is demonstrating that the prices agreed upon in transactions between related parties align with market conditions. To prove the market nature of a transactional price, a comparability analysis must be prepared, utilizing financial databases such as the OrigoData Financial Statements Database or the OrigoData Corporate Bonds Database. OrigoData not only provides financial databases but also tools that facilitate the creation of comparability analyses for transfer pricing documentation in a straightforward manner.

How to prepare a comparability analysis using analytical tools provided by OrigoData? 

OrigoData Financial Statements Module

We have divided the process of creating a comparability analysis into the following stages:

Stage I – Defining a Group of Potentially Comparable Entities

We begin by specifying the industry, analysis period and geographical area. Additionally, companies with capital ties can be excluded upfront.

Stage II – Introducing Qualitative and Quantitative Criteria

The key step in analyzing external comparative data is selecting the data. At this stage, it is essential to decide which selection criteria to apply to obtain the most comparable sample of entities. This involves applying qualitative and quantitative restrictions to the search criteria.

Qualitative criteria restrictions help exclude entities whose financial data is unavailable for the analyzed period. Quantitative criteria restrictions limit the sample by establishing acceptable ranges for minimum and maximum revenue or profit values, or by excluding entities that incurred losses during the analyzed period. Additionally, filters can be applied to reject entities that reported transactions with related parties in their financial statements.

Stage III – Verification of Business Entities

At this stage, each entity in the sample must be verified for comparability regarding its product offerings or the scope of services relative to the analyzed entity. This process is not automated, as the analyst must use available knowledge about the examined entity to determine whether an entity in the sample is comparable. If it is not comparable, the reason for rejection must be provided.

Stage IV – Selection of Financial Indicators and Report Generation

After completing the final verification of business entities, the appropriate financial indicator must be selected, and a report containing the comparability analysis generated.

The comparability analyses generated by OrigoData are based on the indicators outlined in the transfer pricing regulations. From the list, the following financial indicators can be freely selected:

• Gross profit margin,
• Gross markup on sales,
• Net profit margin,
• Net markup on sales,
• Operating margin,
• Operating markup,
• Gross profit margin,
• Gross profit markup,
• Return on assets,
• Return on equity,
• Berry ratio,
• Resale price margin.

OrigoData Corporate Bonds Module

We have divided the process of creating an analysis into the following stages:

Stage I – Selecting Search Criteria

Start by specifying the issuance date of the bonds and the term for which they were issued (short-, medium- or longterm). The Corporate Bonds Database only includes data on bonds issued in PLN, so there is no need to specify the currency.

Stage II – Calculating the Borrower's Rating

At this stage, input the loan agreement date to assign issuer ratings from the corresponding reporting periods. Next, provide the borrower's financial data from the specified reporting year, which will be used to calculate a rating comparable to that of bond issuers.

Stage III – Verifying Corporate Bond Packages

This step is manual. Assess whether the listed bond packages are comparable to the loan agreement. If they are, accept them; if not, reject them and provide a reason for rejection. The following criteria are recommended for evaluating bond packages:

• Date of the agreement,
• Duration of the agreement,
• Transaction amount,
• Currency of the analyzed transaction,
• Credit rating,
• Type of collateral, if applicable,
• Industry/sector.

To calculate the actual interest rate for a specific date, input the date for which the transaction's market terms are being tested.

Stage IV – Summarizing Results and Generating the Report

At this stage, the system will present a list of accepted bonds, indicating the actual interest rate on the selected date and the issuer's rating. A market interest rate range will also be calculated based on quartiles. If the sample is satisfactory, generate the report.