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ProwessTraX Prowess Application for TRAnsfer Pricing TaXation with Automated Documentation
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07 Aug 2015 3:29 PM, Shiuli Mishra

Why standardised database neccessary for Transfer Pricing studies?

A standardised database is necessary to conduct a transfer pricing study. Be safe, be sure, use Prowess TraX.

A non-standardised database of financial data increases the risk of arriving at mis-leading results in a transfer pricing study.

A non-standardised database comprises of data that are not comparable across companies and over time. It does not ensure that the individual data items are classified and defined such that they are comparable. For example, if some companies classify expenses on coal as a part of raw materials and others classify these as a part of energy expenses distinct from raw material expenses, a non-standardised database would report it as given by the companies. In the process, it makes both, raw materials and energy expenses of the two companies not-comparable.

A standardised database on the other hand, ensures a clear definition of each data item and therefore it classifies each data item consistently as per this definition. This ensures that the data is comparable across companies, and also over time. This enables a meaningful peer comparison, which is critical to any transfer pricing study.

Consistent classification of income items such as sale of scrap, fiscal benefits, gains from securities transactions into say “other income” or not could make a material difference to a study. CMIE ensures that you would never have to worry about this problem.

A lot of the standardisation process is about the consistent classification of specific accounting items. It therefore largely leads to the appropriate re-distribution of items heads into appropriate data items. This re-distribution should not have a major impact upon profits. Yet, we find that standardisation is necessary even to make profits comparable. This is critically important in a transfer pricing study.

A transfer pricing study essentially is about comparing profit margins of the target company with its most appropriate peers. An assumption in the study is that the profit margins of all companies as computed from the published Annual Reports is comparable. But, this is not necessarily true.

We find that about five per cent of the companies report a profit that is not comparable. In over two per cent of the companies the difference between the stated profit and the comparable profits is over five per cent or there is a sign change (ie profits turn to losses or vice versa).

Save the risk of comparing non-comparables and drawing incorrect results. Be safe. Use Prowess TraX - a well standardised database. Further, be sure. Prowess TraX provides complete transparency in the standardisation process adopted by CMIE.