After all, perhaps no one is better able to provide an initial industry categorization than those who are paid to study public companies in detail. Given that, I chose instead to rely on the industry categorizations that investment analysts give to companies. Many practitioners make those selections with standard industrial classification or North American Industry Classification System codes however, in my experience, that leads to an excessive number of companies to screen that are not even closely comparable to the tested party. Selecting the initial companies to include in the search is important. The goal is to focus on companies specializing in distribution, supply chain, and logistics functions, rather than vertically integrated providers that also develop and manufacture products. It also targets companies distributing maintenance, repair, and operating (MRO) products for construction use, such as fasteners, material handling equipment, and power tools. The benchmark seeks to provide a range of companies distributing an array of construction distribution products, such as roofing insulation interior fixtures and heating, ventilation, and air conditioning (HVAC) products. The goal is to have a set of companies that might be comparable to a tested party that performs distribution of building materials and ancillary items used in residential and commercial construction. I started by identifying the North American construction distributors that I wanted to benchmark. Although all figures have been double-checked, I lack the manpower and expensive tools that consulting companies use in guaranteeing complete accuracy for their clients. Practitioners should always double-check data and validate company financials before using them in transfer pricing analyses and should not rely solely on the data in this article. This article uses data-mining techniques to pull data from companies’ Forms 10-K. Practitioners should always examine each company before deciding whether it would be comparable to the tested party. Certainly, the facts and circumstances of individual intercompany transactions should be scrutinized against the series content to make an informed decision on the intercompany transaction at hand. This series could be used as a starting point for evaluating comparable companies. This series also attempts to take the complexity out of benchmarking analyses that use expensive tools, demonstrating that all practitioners could perform benchmarking analyses using information and tools that are likely already at their disposal. Enter this series of articles, meant to provide tax practitioners worldwide with suggestions for transfer pricing benchmarking and information for the most widely used CPM intercompany transactions. Given the proliferation of publicly available data, free screening tools, and data-mining techniques, now is the time to provide clients with corroborative benchmarks and data. On the other hand, taxpayers continue to pay for a service that has nearly become commoditized and yet still lacks publicly available secondary resources for practitioners. On the one hand, that benefits multinationals by significantly decreasing the turnaround time for benchmarking studies. However, most consulting firms have already standardized the process with dozens of off-the-shelf benchmarks that can be provided to clients on request. For transactions driven by the comparable profits method, a search generally is required for identifying companies that are comparable to the tested party. One key aspect of nearly all transfer pricing documentation is a benchmarking analysis. As compliance requirements have risen, consultancies have turned to automation and standardization of nearly all documentation work, decreasing their costs of performance. Multinational groups are required to issue transfer pricing documentation reports in more jurisdictions than ever before, leading to increased compliance costs. Transfer pricing has shifted toward a compliance-driven world. In this article, part of a series providing transfer pricing benchmarks that can be replicated by practitioners using readily available public data, Hughes considers a North American construction distribution benchmark for transfer pricing. Andrew Hughes is an economist specializing in transfer pricing and valuation.
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