The significance and effects of the independence criterion on transfer pricing analysis

Transactional net margin method is one of the most frequently used methods in today's transfer pricing analyses. In this method, an independence criterion is determined which aims to ensure the obtained results belong to the transactions realized between unrelated entities. This criterion is based on a set of independence indicators compiled from a commercial database. However, there are no national or international guidelines on how to select indicators when determining an independence criterion. For this reason, the selection of independence indicators is usually based on subjective judgments. The ideal situation that will meet the arm's length principle is to determine the independence criterion using the most conservative indicator. However, this ideal situation often leads to the problem of insufficient comparable data based on the business scope of the tested party. Alternative scenarios can be used to resolve this problem. In this study, we conduct a comparable data analysis for three different industries using the Amadeus database and examine the effects of the independence criterion on benchmark results. Then, using these results, we evaluate how appropriate alternative strategies could be applied in practice. For this purpose, we determine research strategies to be applied on the database for each scenario, process the resulting data, and then, make benchmark range calculations using statistical methods. After evaluating the results obtained from the calculations, we interpret alternative strategies that can be used in determining the independence criterion and their applicability. Our primary finding is that when we expand the independence criterion, we obtain three to four times more comparable data. This result shows that it may be necessary to extend the independence criterion to determine a statistically significant arm's length range in comparison. The second finding is that there is a general upward trend in profitability indicators when the independence criterion is expanded. This trend will affect tax authorities' view of transfer pricing analysis.