Selecting Transfer Pricing Comparables: Precision and Process over Quick Results
Comparable data is the heart of every comparability analysis in transfer pricing. If the wrong comparables are selected, the entire conclusion regarding the arm's length nature of affiliated transactions can collapse under tax authority scrutiny. Chapter III of the OECD Transfer Pricing Guidelines (TPG) 2022 emphasizes that the process of identifying comparables is one of the most critical aspects of comparability analysis, and it must be conducted in a transparent, systematic, and verifiable manner (para. 3.46). This provision is reinforced domestically under Article 8 of Finance Minister Regulation (PMK) No. 172/PMK.03/2023. The issue is that many taxpayers still view this process as merely "searching the database and taking what fits." In reality, the underlying sequence and rationale are far more important than the resulting figures alone.
No Obligation to Search Exhaustively Across All Sources
A common misconception is that taxpayers must scour every conceivable data source worldwide before determining comparables. The OECD TPG (para. 3.2) affirms quite the opposite: what is required is the most reliable comparables reasonably available, rather than an exhaustive and boundless search. The quality of the process is also far more critical than mechanical compliance with formal steps; an arm's length outcome is not automatically guaranteed simply because certain procedures were followed, and vice versa (para. 3.4). The foundation of any search for comparables starts from the functional analysis of the tested transaction, not from the database itself.
Internal Comparables First, Then External
Article 8 of PMK-172/2023 divides comparables into two categories:
Internal comparables: Transactions between an independent party and the taxpayer, or with the affiliated counterparty to the transaction.
External comparables: Transactions between independent parties other than internal comparables.
Two priority rules in Article 8 paragraphs (8) and (9) are frequently overlooked in practice:
If internal and external comparables are available with an equal degree of comparability and reliability, the internal comparable must be selected.
If multiple external comparables with an equivalent level of comparability are available, priority is given to those originating from the same country or jurisdiction as the tested party.
This means the search for comparables should ideally not begin directly with commercial external databases. The taxpayer's own transactions with independent parties must be reviewed first before proceeding to external comparables.
Two Data Search Approaches
The OECD TPG (paras. 3.40–3.42) distinguishes two approaches to identifying prospective comparables:
Additive approach: Compiling a list of third parties already known to engage in similar transactions, such as known competitors, and subsequently verifying whether they fulfill comparability criteria.
Deductive approach: Starting with a broad pool of companies within the same sector, then filtering them stepwise using screening criteria and public information, such as commercial databases, websites, or competitor data.
The deductive approach is generally easier to replicate and verify because it focuses on process and the relevance of selection criteria (para. 3.44), although its outcomes depend heavily on the quality of the underlying database. In practice, these two approaches are often combined rather than treated as mutually exclusive.
Three Effective Screening Stages
Once the initial set of candidate comparables is assembled, screening typically proceeds through three stages:
Initial screening: Based on industry classification codes and business keywords to eliminate clearly irrelevant entities.
Quantitative screening: Using financial ratios, applying commonly accepted criteria (para. 3.43) such as business scale (sales, assets, employee count), ratio of intangible assets to total assets, export sales ratio, inventory ratio, and the exclusion of companies under special conditions such as start-ups or bankruptcy.
Qualitative screening: A manual review of each candidate's business profile, product portfolio, and operating strategy.
While quantitative criteria are easier to verify, they do not guarantee commercial relevance. Qualitative screening remains essential to ensure no comparable passes the numerical thresholds while lacking actual business comparability.
When Foreign Comparables Can Be Used
Taxpayers cannot always identify sufficient domestic comparables, especially in industries where Indonesian data is scarce. The OECD TPG (para. 3.35) emphasizes that non-domestic comparables should not be automatically rejected solely because they are not domestic. Their reliability is evaluated on a case-by-case basis, considering the extent to which the five comparability factors are met: contractual terms, functions-assets-risks, product characteristics, economic circumstances, and business strategies. However, the priority rule in Article 8 paragraph (9) of PMK-172/2023 continues to apply: if multiple external comparables have an equivalent level of comparability, priority must be given to those from the same country as the tested party. Foreign comparables represent a reasonable alternative when domestic data is genuinely insufficient, rather than a default first choice.
Ultimately, identifying comparable data is not a race to extract numbers quickly from a database. It is about a defensible, accountable process: beginning with internal transactions, following the correct order of regulatory priority, and screening against criteria that are economically and commercially sound, rather than merely statistically convenient.
For further consultation on comparability analysis and transfer pricing documentation, PRAS inc. is ready to assist. Contact our team through the PRAS inc. website or official social media channels.
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