The application of the arm’s length principle, at its core, requires that reference is made to comparable uncontrolled transactions. This is true for the application of all transfer pricing methods, including the transactional profit split method, which is of little value unless credible argument can be made that the determination of profit to be split, and the factors used for splitting it, are in line with what independent parties under comparable circumstances would do. In practice, though, where the application of the profit split method is relatively rare, the comparability analysis is the actual backbone of the application of the arm’s length principle. Ultimately, comparability analysis is the tool in the hands of tax authorities and taxpayers to determine whether tax liabilities of associated enterprises may or may not be distorted because they are related.

It is perhaps surprising, therefore, that the actual way of conducting comparability analyses and the identification of acceptable and reliable comparables is such a bone of contention between taxpayers, practitioners, and tax authorities. The OECD, for its part, struggled for the last 15 years to provide specific practic...