Transfer Pricing Comparables: Preferring a Close Neighbor Over a Far-Away Peer?

forthcoming in Journal of International Accounting, Auditing and Taxation

52 Pages Posted: 7 May 2020 Last revised: 5 Jan 2022

See all articles by Bert Steens

Bert Steens

VU University

Thibaut Roques

Independent

Sébastien Gonnet

affiliation not provided to SSRN

Christof Beuselinck

Catholic University of Lille - IESEG School of Management

Matthias Petutschnig

Vienna University of Economics and Business

Date Written: September 3, 2021

Abstract

In a globalized economy, transfer pricing estimations are key in valuing international transactions between entities of multinational corporations (MNCs), and the use of uncontrolled peer group comparison methods are widespread. In the absence of uniform guidelines on the optimal identification for comparable companies, however, it remains a concern that poor selection choices may lead to biased estimates. This may systematically bias cross-jurisdictional revenue flows. The current approach employed by tax practitioners and implicitly endorsed by several tax administrations worldwide commonly relies on comparables from neighboring countries. We employ a global sample of over 11,000 manufacturing firms located across 84 countries over the period 2012-2016. We find evidence that the risk level of the country of incorporation of the companies is highly correlated with their profitability and that geographical closeness is less relevant for explaining profitability when controlling for country risk. Our findings suggest that the search for foreign comparables is better guided by country risk rather than geographic proximity and that insufficiently controlling for country-level sovereign risk biases high-risk countries’ corporate tax revenues downwards. We conclude that the accuracy of comparables is likely to benefit from expanding the scope of observations to a global level, while controlling for country risk.

Keywords: Transfer pricing; Corporate taxation; Accounting Comparables; Country risk; Geographical proximity

JEL Classification: F23; F36; H20; M4

Suggested Citation

Steens, H. B. A. and Roques, Thibaut and Gonnet, Sébastien and Beuselinck, Christof and Petutschnig, Matthias, Transfer Pricing Comparables: Preferring a Close Neighbor Over a Far-Away Peer? (September 3, 2021). forthcoming in Journal of International Accounting, Auditing and Taxation, Available at SSRN: https://ssrn.com/abstract=3573905 or http://dx.doi.org/10.2139/ssrn.3573905

H. B. A. Steens

VU University ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands
+31205986035 (Phone)

Thibaut Roques

Independent ( email )

Sébastien Gonnet

affiliation not provided to SSRN

Christof Beuselinck (Contact Author)

Catholic University of Lille - IESEG School of Management ( email )

3 Rue de la Digue
Office: A321
Puteaux, 92800
France
+33320545892 (Phone)

Matthias Petutschnig

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Building D 3
Vienna, Wien A-1020
Austria

HOME PAGE: http://www.wu.ac.at

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