The key role of benchmarking in safeguarding a taxpayer

The primary purpose of a benchmarking analysis is to establish and verify that the terms and conditions in transactions between related parties correspond to the arm’s length principle. Although only one of the integral elements of transfer pricing documentation, these analyses are crucial for taxpayers to meet their transfer pricing obligations. Unfortunately, taxpayers usually realize it during tax audits and disputes with tax authorities.

The relevance of benchmarking analysis was recently confirmed in the Ruling of the Voivodship Administrative Court in Gliwice of 24 July 2023 (ref. I SA/Gl 1618/22).

According to the ruling, the appellant company was audited and the tax authorities revealed irregularities resulting in the understatement of the company’s due tax liability.

The transaction reviewed by the tax authority was the company’s receipt of funds in the form of a line of credit at PLN 140 million from a Germany-based related party. As a result of the audit, the first-instance authority found that the company had overstated its deductible expenses in 2014 by PLN 1.53 million – due to the failure to apply the arm’s length interest rate on the loan taken from the related party.

The company appealed the decision to the Director of the Tax Administration Chamber. However, it upheld the decision of the first instance. The company then appealed the decision to the Voivodship Administrative Court, which – after reviewing the case – found that the company’s complaint deserved to be upheld.

Benchmarking analysis as a subject of dispute with tax authorities

The tax authority’s conclusions regarding the company’s overstatement of deductible costs were based on the authority’s benchmarking analysis. The analysis was made based on the comparable uncontrolled price method on bid data the authorities obtained from financial institutions (banks).

As part of the benchmarking analysis, the authorities obtained bid data from two banks. They served as the basis to determine arm’s length interest rates for comparable transactions: from 5.22% to 6.72%. The interest rate applied by the company during the period under review was set at 6.75%.

The company appealed the authorities’ decision to the VAC. It stated their analysis was unreliable and featured numerous irregularities.

The main allegations voiced by the company included:

  • the authority’s comparison of data on the interest rate on loans of PLN 140 million with the interest rate in a revolving credit line transaction with a limit of PLN 140 million,
  • the authority’s stating in the inquiries the purpose of the loan defined as the development of the business entity, which does not correspond to the purpose of the controlled transaction: to refinance the company’s previous credits and consolidate the company’s financial obligations to related parties,
  • determination by the authority of the arm’s length value of the interest rate on the basis of the general terms and conditions presented by the banks and not based on the data for transactions actually made in the market (according to the company, the determination of the terms and conditions of bank loans for amounts comparable to the value of the transaction is subject to negotiations with the bank and is determined individually and preceded by an analysis of the borrower’s creditworthiness and an assessment of credit risk),
  • the authority’s making analysis on the basis of very limited comparative data: two bank offers,
  • the authority recognizing as a comparable value for the transaction only one (!) offer, presenting the lower of the interest rates (i.e. 5.22%) which is more unfavorable for the company.

VAC’s position

The VAC stated that a properly made benchmarking analysis of the course of the transaction should take into account the risks incurred by the transacting parties.

In the Court’s opinion, identifying comparable transactions with identical parameters for the purpose of preparing a benchmarking analysis can be problematic. However, there is no doubt that in the situation, the authority should obtain comparable data for the analysis by presenting all the relevant terms of the loan in its request for bank offers. According to the VAC, if the authority did not indicate all the terms and conditions of the controlled transaction at the stage of obtaining comparative data, it cannot be determined whether the analyzed transactions are comparable.

The court found that by failing to establish all relevant comparability factors in order to properly select and pick out comparative data, there was an erroneous determination of the arm’s length interest rate at 5.22%. Plus, an analysis of the appealed decisions and the case file confirm that the tax authorities did not obtain information on the level of the loan to be considered arm’s length.

In the end, the VAC overturned the tax authority’s decision which the company had appealed. The court also ordered that the benchmarking analysis be made in accordance with the provisions indicated.

Relevance of benchmarking analyses

The ruling confirms how important transfer pricing analysis is for taxpayers and emphasizes the relevance of this part of transfer pricing obligations for taxpayers.

Therefore, a benchmarking analysis should be a high-quality study: in terms of the process of its preparation itself and in terms of the reliability and proper selection of comparable data. This requires providing adequate justification for the inclusion (or rejection) of comparability criteria in the process of selecting data for the sample.

A properly prepared analysis is a safeguard for the taxpayer against an alternative benchmarking analysis prepared by the authority. Ultimately, it may be a safeguard against an overestimation of the value of the settlements in the transaction and the taxpayer’s CIT liability.

Also, please note that in the event of a dispute with the tax authorities, the authorities must first challenge the taxpayer’s analysis. Only in the next step can they prepare their own analysis.


Piotr Goldman

Senior Consultant, Transfer Pricing Practice

Tel.: (+48) 503 973 422