4 Things You Need to Know if you want a reliable Benchmarking Analysis

For those unfamiliar with transfer pricing, Benchmarking analysis, in a nutshell, is an economic analysis performed using a methodology (also known as transfer pricing method) to support the prices set in a transaction between international related parties.

Benchmarking analysis is the backbone of the transfer pricing documentation as they support with reliable economic data the taxpayer’s positions outlined in the transfer pricing documentation by comparing the related party transaction that is being tested with transactions entered between third parties in same or similar circumstances.
Getting it right will mean minimising the risk of a transfer pricing adjustment as the data contained in the benchmarking analysis will be the basis to defend a taxpayer’s position in front of the The Inland Revenue Board of Malaysia (“IRBM”) . 

• ‘Off the shelf’ benchmarking analysis whereby one benchmarking is sold to various taxpayers over and over without taking into consideration the circumstances of the taxpayer will only help to tick the box from a compliance perspective. However, in substance, this approach does not follow Malaysia Transfer Pricing Guidelines and arm’s length principle because it overlooks the comparability analysis between the transaction that the taxpayer is testing against third party data.  
•  Tailored benchmarking analysis to the taxpayers’ circumstances is the recommended approach because it appropriately addresses all of the comparability factors that as per the Malaysia Transfer Pricing Guidelines needs to be addressed and ultimately will provide a strong basis to defend in a transfer pricing audit.

Transfer pricing is still considered a grey area and under the current environment with new legislation in Malaysia, there is uncertainty about the application of these new standards in a court case scenario. In audit or court case scenario, Tax Authorities/Judges may or may not agree with your benchmarking approach.

In our experience, the challenges from the tax authorities aimed to tackle the decision-making process and the reasons for accepting a certain group of comparable data that ultimately alters the results. For this reasons, when performing a benchmarking analysis both the results and the process to get the results are equally relevant.

Also, an audit or a court case is likely to happen various years after the benchmarking analysis was performed and the people involved may or may not be in the organisation. Therefore, keeping records and files on the worked performed is key to defend your comparable data in case of a disagreement on the results with a tax authority.

A Benchmarking Analysis is performed using appropriate and reliable data. Therefore, whether you perform the benchmarking or outsourced to a third party, it is important that the data is appropriate, reliable and also accessible to the IRBM.