Quick answer
An internal comparable is a similar transaction between the tested party or its group and an independent party; an external comparable is an independent company found in a benchmarking database. A reliable internal comparable is generally preferred because it matches the tested party's facts most closely, but internal comparables are rare, so most UAE studies use external comparables.
Key takeaways
- Internal comparable: the group's own similar transaction with an independent party.
- External comparable: an independent company drawn from a benchmarking database.
- A reliable internal comparable is generally preferred, but they are rare.
- Look for internal comparables first and document the search.
- Most UAE studies use external comparables, screened carefully.
Table of contents
In transfer pricing, a comparable can be internal, a similar transaction the tested party or its group has with an independent party, or external, drawn from independent companies’ published financials. A reliable internal comparable is usually preferred because it matches the tested party’s own facts most closely. Most UAE studies still rely on external comparables, simply because internal ones are rare.
What Is an Internal Comparable?
An internal comparable is a transaction between one of the related parties and an independent third party, on terms similar to the controlled transaction being tested.
Example: a UAE trading company buys the same product from its overseas parent and from an unrelated supplier, in similar volumes and on similar terms. The price paid to the unrelated supplier can be an internal comparable for the price paid to the parent.
What Is an External Comparable?
An external comparable is an independent company, identified from a benchmarking database such as Orbis or TP Catalyst, whose functions, industry and financial results resemble the tested party’s. External comparables underpin most benchmarking studies because they are far more widely available.
Internal vs External Comparables at a Glance
| Internal comparable | External comparable | |
|---|---|---|
| Source | The group’s own dealing with an independent party | Independent companies’ published financials |
| Closeness of match | Very high when it exists | Good after careful screening |
| Availability | Rare | Broad, through databases |
| Main risk | Differences in volume, terms or timing | Differences in functions, risks and accounting |
| Typical use | Preferred where reliable | The default for most studies |
Which Comes First?
The OECD guidance the FTA relies on treats a reliable internal comparable as generally more direct than an external one. A study should therefore:
- look for internal comparables first, such as sales or purchases with independent parties;
- test their reliability: are volumes, terms, markets and functions similar enough, or can differences be adjusted?
- document the search and the conclusion, even when no internal comparable is found;
- where none is reliable, build a well-screened external set.
When Do Internal Comparables Fail?
Internal comparables are often rejected because of differences that cannot be measured reliably:
- very different volumes or contract lengths;
- different markets or customer types;
- different risks, such as credit or inventory risk;
- one-off transactions that do not reflect normal trading.
Expert tip: even if you expect to use external comparables, record the internal comparable search in the study. The FTA may ask why the group’s own dealings with independent parties were not used.
Related guides: Transfer pricing benchmarking · Transfer pricing services · TNMM benchmark studies · Benchmarking tools and databases · How many comparables · Internal vs external comparables
Frequently Asked Questions
01.What is the difference between internal and external comparables?
An internal comparable is a similar transaction the tested party or its group has with an independent party. An external comparable is an independent company's data drawn from a benchmarking database.
02.Are internal comparables better than external ones?
A reliable internal comparable is generally more direct because it matches the tested party's own facts, but internal comparables are rare, so most studies use external comparables.
03.Which should a UAE transfer pricing study use?
Look for a reliable internal comparable first and document the search. Where none exists, a carefully screened external comparable set is the accepted and most common basis.
04.Can an internal comparable be adjusted?
Yes. Differences in volume, terms, timing or functions can be adjusted if they can be measured reliably. If they cannot, the internal comparable may not be usable.
