One of the oft-encountered problems in the application of profit-based methods is the lack of reliable data for independent comparable companies operating in the same country or economic region as that of the dependent tested party. This problem may manifest itself in some of the smaller developed countries, but is particularly acute in most of the emerging/developing economies. The apparent lack of comparables in developing countries recently rose to prominence by taking a spot in the agenda of the G8 summit held in June 2013.
The lack of local comparables is often addressed by practitioners by using suitable comparables from other jurisdictions. Yet, when such comparables come from countries with significantly different economic conditions than the country of the tested party, some adjustments to account for these differences are called for.
In this series of articles from Transfer Pricing International Journal, NERA Vice Presidents Sébastien Gonnet and Dr. Vladimir Starkov, Senior Consultant Amanda Pletz, and former NERA Consultant Madhura Maitra explore the options of improving comparability in cases where nondomestic comparables are used. In the first article, the authors provide an overview of existing guidelines and literature on adjustments for economic differences, illustrate the need for economic circumstances adjustments, and describe some of the techniques that can be used to implement adjustments for the differences in economic conditions. The second article provides practical application and examples.