A Word on Comparability

In transfer pricing, comparability analysis hinges on the concept of comparability. The concept has never been properly understood by most practitioners in the field, lest there would not have been popular misconception that the whole transfer pricing practice consists merely of a monotonic workflow capable of being translated into a computer algorithm. This has led certain database operators and software developers boldly claiming to have certain expertise in the field and selling their ‘transfer pricing solution’ with nowaday's all-too-common catch-phrase of fraudulent CPAs: ‘BEPS'. And what is more depressing to know is that certain consulting houses are proudly boasting of having formed alliances with them, oblivious to the fact that blind reliance on technology only leads to 'professional slavery.'  

I am not saying modern computer technology has nothing at all to contribute to the field of transfer pricing. There are certain facets / elements in the practitioners’ tasks so routine in nature that it would be a good idea to use third-party resources or to write a few lines of codes for automating routine and repetitive tasks, but only to the extent that the practitioners know exactly what the automated process exactly entails.

Going back to the subject matter, for precise understanding of the concept of comparability, one needs to appreciate the fact that it is entirely different from the notions of similarity and disimilarity. Here is an illustration: 

Here are apple, tangerine, persimmon, pineapple, and banana. These fruits are  now quite common in the countries of East Asia, i.e., Korea, Japan and China.  10 out of 10 people you may run into in the streets of any of these countries are highly likely to be able to identify these fruits by name. 

Let’s suppose you are taking a survey of a number of randomly selected respondents. You ask them simply to compare these fruits. Despite various methods or approaches employed or personal tastes, the respondents would most likely conclude that all or part of these fruits are either different, similar or, if some extraordinary methods or categories are applied, identical. In this exercise, the act of ‘comparison’, from the respondents’ standpoint, is both the means and the end in itself. In other words, the act of ‘comparison’ is no more than 'an examination of two or more items to establish similarities and dissimilarities’. Their actions are not intended to lead to anywhere. Similarity or dissimilarity is the only possible conclusion here, whether the basis for such conclusion was highly subjective or more or less objective. Hence, comparison here is both complete and final and leads to no further act or consequence. 

Now, in the second exercise, the same respondents are shown another fruit:

This is Durian. Durians are quite a rarity in East Asia since they are grown mostly in tropical regions i.e., Southeast Asia. One would occasionally find them at the fruit sections of one or two local discount stores in the metropolitan cities but you wouldn’t expect a local in the remotest part of provincial regions to know what Durian is.  

Let’s suppose that the respondents are asked to explain Durian to a 70-year old resident of one of the provincial regions, who has never seen or even heard of such a rarity. Let’s also suppose that the respondents are only allowed to use the five fruits above as a means to explain various characteristics of Durian. The respondents are most likely to produce the following descriptions: 

The pulp is comprised of three to four sections, similar to a mandarine. 

The color of the pulp is smoky yellow, just like an apple. 

The texture of the pulp, when bitten, is like a ripe persimmon but it tastes like a banana. 

Durian is grown from a tree just like the five fruits. 

The outer texture of Durian feels and looks like pineapple, even when it is ripe. 

In producing the above, the respondents must analyze the object tested i.e., Durian in order to identify ‘physically relevant or significant characteristics’ or ‘PSCs’. Then they must seek out these PSCs from each of the five fruits, in order to determine in what manner they may be used to explain Durian.  

The goal here is to describe Durian to a person having no prior exposure to the fruit. The respondents have to use the five fruits according to the degree of their associations with Durian’s specific PSCs. That way, they could formulate the most descriptive explanation of Durian according to their expectation of the the person’s existing level of understanding of each of the five fruits. The person has no other choice than to imagine what Durian is entirely based on the respondents’ explanation. 

In this second exercise, there is no room for finality allowed for the notions of similarity and dissimilarity as in the first exercise. The five fruits are employed as means to explain Durian; their ultimate similarity or dissimilarity amongst themselves or even with Durian has no relevance at all.