Application of comparability analysis for transfer pricing in developing countries

Abstract: The absence of domestic databases for transfer pricing comparability analysis in developing countries, especially in Africa, creates difficulties between tax administrations and taxpayers to resolve their transfer pricing disputes. Due to various factors, developing countries, including some in Africa, do not have their own local databases and domestic comparables with which to conduct transfer pricing comparability analysis. This study outlines the challenges and difficulties encountered by both taxpayers and tax administrations in finding suitable data that can be used to conduct a transfer pricing comparability analysis in specific countries. To mitigate the identified challenges and difficulties, the study considers alternative approaches that are used by advisory firms, multinational enterprises, and tax administrations in developing countries; these are employed as an alternative solution. The study also evaluates the reliability and effectiveness of these alternative approaches. The study aims to investigate the effects of the lack of domestic comparable data that can be used in transfer pricing analysis in developing countries, with the aim of recommending practical resolutions as to how these markets can comply with the requirements of performing a transfer pricing comparability analysis. The study indicates that both developed and developing countries adopt the OECD’s arm’s length principle when evaluating dealings between related parties. The arm’s length principle is widely accepted and extensively used in conducting comparability analysis of related party transactions undertaken by a taxpayer and those of independent comparable parties by conducting a benchmark study on databases. The findings of the study also reveal the contributing factors, which are hindering the developing countries to have local comparables are due to financial constraints to fund local databases and the lack of lack of statutory requirement for private entities to publish their annual financial statements. Consequently, they resort to foreign or nondomestic comparables and databases. The study further reveals that the OECD provides other alternatives, which can be used by tax administrators and taxpayers for transfer pricing analysis, which do not focus on obtaining direct comparable data.M.Com. (South African and International Taxation