2.5 Comparability Adjustment

2.5.1 Comparability adjustment is an important element of comparability analysis that, when applied appropriately, enhances the accuracy and reliability of comparison. Differences between the transaction of the comparables and that of the tested party must be identified and adjusted for, in order for the comparables to be useful as basis for determining the arm's length price.
2.5.2 Comparability adjustments are intended to eliminate the effects of differences that may exist between situations being compared and that which could materially affect the condition being examined in the methodology (e.g. price or margin). Logically, comparability adjustments should not be performed to correct differences that have no material effect on the comparison. Thus, these adjustments are neither routine nor mandatory in a comparability analysis; rather, improvements to comparability should be shown when proposing an adjustment. Comparability adjustments include accounting adjustments and function/risk adjustments.

Adjustments need to be considered with much caution, on a case-by-case basis, and should only be applied to good quality comparables in light of information available in order to improve their accuracy. The following should be avoided as they do not improve comparability:

  1. adjustments that are questionable when the basis for comparability criteria is only broadly satisfied;
  2. too many adjustments or adjustments that too greatly affect the comparable as it indicates that the third party being adjusted is in fact not sufficiently comparable;
  3. adjustments on differences that do not materially affect the comparability; and
  4. highly subjective adjustments, such as on the difference in product quality.

Working capital adjustments should only be considered when the reliability of the comparables will be improved and reasonably accurate adjustments can be made. They should not be automatically made and would not be automatically accepted by IRBM. These adjustment make minor differences to the result when reliable comparables have been selected. In cases where significant difference is calculated, it will raise concern as whether the differences resulted from other issues.