Benchmarking in transfer pricing

trueBy Ian Mutibwa

The world has reduced into a global village and technology continues to shrink the world further. In a more reduced world therefore comes issues of taxation and particularly the merger of both public and private international law.

Borrowing from the preface of the Organisation of Economic Cooperation and Development (“OECD”) guidelines which stated that the role of multinational enterprises in world trade has increased dramatically and thus presents increasingly complex taxation issues, it is essential to note that the complex issues are not far from Uganda.


The fact that multinationals have to comply with different laws and administrative requirements that differ from country to country. One of the most difficult issues that have arisen is finding the appropriate transfer prices.


Transfer prices are the prices at which an enterprise transfers physical goods and intangible property or provides services to associated entities. Transfer prices are significant for both the taxpayers and the tax administration because they determine the income and expenses of a company and therefore taxable profits.


It should be noted that in Uganda the transfer pricing guidelines also envisage, related party transactions in the domestic realm. The OECD only considers transfer prices between multinational corporations in different jurisdictions.


Perhaps the most relevant issue that has come up in the quest for transfer pricing is the issue of “benchmarking” transactions and therefore the need to have comparables and comparability analysis.


The comparability analysis in Transfer pricing always aims at finding the most reliable comparables. In order to have a good comparison, one needs to look at the economic, competition, industry and regulatory factors and other elements that affect the taxpayer and its environment. Companies in the same industry, similar economic circumstances and social political environment make the best comparisons. As such both internal and external comparables may be used.


It is important to compare like with like. Consequently, companies of the similar industries, economic conditions, sales volumes, functions, assets and risks are compared. It should be noted that internal comparisons are the best to use in most circumstances. This means that a company has supplies, deliveries or sales to both related and non-related companies may be used so as to come up with an Arms-length price.


External comparisons are usually from other sources not within the company itself. Under Article 4.3.1 of the OECD guidelines, it is provided that such comparable information may be got from commercial databases which are available for search and analysis purposes. These commercial databases are rare to come by and many companies have to pay hefty sums so that they can have access to the databases.


Article 4.3.31 particularly highlights the problem with this external comparability approach. Such databases are not readily available since not all countries may have such information about their local companies.


In Uganda for example, we do not have a system that has developed to such a stage that it can be used to compare different companies and obtain an arms-length price. In effect, many of the comparisons are done in India and other Middle Eastern countries, Eastern European countries and some African countries where comparable companies have provided data to the commercial databases.


The implications thereof are far reaching and these include: issues of how reliable these benchmarks done using international comparables are.


As noted many of the comparables are not done using local companies but benchmarked using international companies many of which have different social economic aspects as compared to the local companies.


The prices therefore may not tell the exact picture we need to paint. In addition the cost of the benchmarks are very high as one needs to pay to access these systems so that they can have their company transactions compared with similar companies in other jurisdictions.


How many companies in Uganda can afford to access these systems and if they cannot afford, then what?


I am of the opinion and it is a tax principle that tax should not be costly to adhere to. It is not the intent of the Uganda Revenue Authority to force companies to pay huge sums of money so that they can comply with transfer pricing regulations and requirements.


However, without the domestic databases, the costs of a transfer pricing documentation benchmark using external comparables are high.


It is therefore a burden upon the Companies Registry to prioiritise the information and Technology sector so that the company information can be put in a system and therefore enable it to be readily available and thus ease the benchmarking of transactions.


Further, the Parliament should hasten the passing of the Data Protection laws in Uganda so that the data collected about companies is protected, otherwise compliance of the Companies in providing such critical financial information with the Registrar of Companies shall also be impossible.

Tax compliance should not be expensive.

The writer is the Tax and Legal Consultant KPMG-Uganda