What is a benchmarking study
Benchmarking studies are the critical part of any transfer pricing documentation file or policy and are mainly used to test the arm's length nature of the related party transactions in preparing a transfer pricing documentation file, set the mark-up attached to the transactions carried out between related parties as part of tax planning exercises and determine the arm's length range deemed to provide an estimate of an arm's length price.
The purpose of benchmarking studies is to determine the general conditions surrounding the transactions conducted by third parties on a given market. Such studies help elicit a range of values, i.e. the so-called arm's length range or mark-up range. Statistically, arm's length range is defined by the lower quartile and upper quartile and is the range of values of price or profit attached to the comparable transactions between comparable unrelated parties.
When a transfer price determined by a taxpayer for a transaction under review (or the profitability derived by taxpayer from such transaction) is not found in the applicable arm's length range, the competent tax authority will determine the arm's length price of the transaction under review using the median value of that arm's length range.