Examining the reliability of transfer pricing comparables: Evidence from Italy based companies

MURA, ALESSANDRO;EMMANUEL C;VALLASCAS F.

2011-01-01

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Abstract

This paper investigates the reliability of using comparables in Italy-based companies to comply with acceptable transfer pricing methods. We adopt an indirect method, based on the comparison of the performances between foreign controlled companies (FCCs) and domestically-controlled companies (DCCs), to show that FCCs outperform their DCCs counterparts in terms of Return on Assets (ROA), especially in the case of small and medium enterprises. This result holds after controlling for differences in size, indus­try sector, regional location, capital structure and investment policies. Furthermore, we demonstrate that the search for comparables, as prescribed by the OECD guidelines with the purpose to apply arm‟s length profit based methods, may need further refinements in the case of Italy-based companies. A large proportion of FCCs are outside the inter­quartile range of the ROA distribution of DCCs but not in the expected direction. Our findings contrast with previous empirical evidence on international transfer pricing (ITP) practice in that FCCs perform better or as well as DCCs indicating that the comparability method suggested by the OECD may be defective if pan-regional or local comparables are used.