Applying Economic Adjustment Factors to Intercompany Technology Licensing Comparables
Economic adjustments to intercompany technology licensing comparables require quantifiable working capital, market scale, and DEMPE functional formulas.
Benchmark Search Screening
Meaning
Comparative analysis starts with a structured process of identifying independent companies that perform similar functions and bear similar risks. A benchmark search screening establishes the range of arm’s length returns used to evaluate the transfer pricing policies of multinational companies in China. It filters thousands of company filings down to a small group of highly comparable entities.
Search Strategy
The filter process proceeds through sequential steps that begin with a broad industry classification search and end with a manual review of annual reports. Quantitative filters remove companies with persistent losses, startup entities, or companies with high transaction volumes with related parties. Local tax offices in Shenzhen and Shanghai typically demand a minimum of three years of financial data to ensure that the screened companies have reached stable commercial operations.
Rejection Reason
Manual rejection reasons must be documented in detail to survive audit scrutiny. Typical grounds for exclusion include a lack of financial transparency, the possession of unique intangible assets, or the performance of divergent economic functions. If a comparable company in Zhejiang holds patents that are not owned by the tested party, it is rejected during this manual screening phase to maintain high comparability standards.
Compliance Burden
Chinese tax authorities often run their own parallel benchmark studies. Any divergence in the database or the screening criteria used can lead to different profit ranges and result in unilateral tax adjustments.