Transfer Pricing Insider

Issues and Perspectives

Selecting a Comparable Database

By David Pluto, Manager, Transfer Pricing

Selecting an appropriate database of comparable information is an important step when using a profit-based method to evaluate the arm’s-length nature of an inter-company transaction. This article will outline some of the database options available and provide some guidelines in selecting an appropriate database.

A brief note on profit-based methods

Profit-based methods are utilized in the absence of comparable uncontrolled transactions or where they provide the most reliable measure of an arm’s-length result. The two most common profit-based methods, the Comparable Profits Method (CPM) and Transactional Net Margin Method (TNMM), rely on comparable company searches to determine arm’s-length benchmarks for one of the participants in the controlled transaction. The participant benchmarked is referred to as the tested party.

Database alternatives

While there are many potential sources of information for comparable company searches – including public-company filings, websites and equity research reports, the most frequently used databases for transfer pricing analyses are those published by Thomson Financial, Standard & Poor’s and Bureau van Dijk. The reasons for their popularity include their depth of coverage, quality of data and acceptance by tax authorities. Though much of the data provided by these vendors is from the sources mentioned above (SEC filings and foreign equivalents), these database vendors compile the data in a standardized and searchable format and perform testing for quality assurance.

Thomson Financial publishes two databases: Disclosure SEC and Worldscope. The Disclosure SEC database provides financial data about companies listed on major US stock exchanges and about the OTC market companies that file with the Securities & Exchange Commission. Thomson’s Worldscope database contains data about over 50,000 companies in 53 countries worldwide. Standard & Poor’s Compustat® North America and Global databases provide data similar to that of the suite provided by Thomson Financial.

Bureau van Dijk’s flagship database, AMADEUS, is a pan-European database that provides financial information about public and private companies in 38 European countries. The version of this database that is formatted for use with CrossBorder Compliance contains information about over 250,000 companies.

Selecting an appropriate database

The primary consideration in choosing an appropriate database is the geographic location of the tested party. For example, if the tested party is located in the U.S., then the comparable company search should be performed in the Disclosure SEC or Compustat® North America database.

Another consideration is whether the comparable company search is going to be performed on a regional or country-specific basis. For country-specific searches, single country databases, like Bureau van Dijk’s FAME, can provide more in-depth coverage than regional databases. However, outside of a few large economies, such as the U.S., U.K., China and Japan, it is often necessary to perform a regional search to identify a sufficiently large set of comparable companies for many functions. The availability of private company financials in the Bureau van Dijk databases can be a mixed blessing. On one hand, they contain private companies that would not appear in the public company databases, facilitating country-specific searches that otherwise would not have been viable. On the other hand, many privately held companies are controlled by a corporate parent, so their results are not at arm’s length. Others lack sufficient publicly available data to make a determination as to whether they are truly comparable.

Regional searches have been growing in popularity since the EU Joint Transfer Pricing Forum released its report and recommendations in 2005, which endorse a “masterfile” approach (a standardized set of information) to transfer pricing documentation.¹ Regional searches represent a cost-effective alternative to country-specific searches in many jurisdictions. The majority of our clients rely on the database suites provided by Thomson Financial and Standard & Poor’s unless they have a substantial European presence, in which case they often license AMADEUS.

In summary, choosing a comparable company database is an exercise in balancing the availability of comparable companies with potential exposure and the cost, both in time and money. This balancing act is more art than science and often depends on personal preference.

Transfer Pricing Insider, Vol. 1, No. 2
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