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How we helped a German specialty food distributor build a robust, defensible benchmarking analysis in a niche market with limited comparable companies.
Our client, a newly established German distributor of specialty food products, faced the challenge of justifying transfer pricing policies to German tax authorities. With initial revenues under €3 million but anticipating rapid growth, the company needed a robust, defensible benchmarking analysis aligning closely with its functional profile.
The niche nature of specialty food distribution posed significant challenges:
We implemented a three-phase approach to solve the client's benchmarking challenge:
Initially, our targeted search specifically for specialty food distributors yielded a small set of 12 companies, predominantly in Southern Europe. We transparently communicated the limitations of this narrow approach to our client, highlighting the potential scrutiny from tax authorities due to limited comparability and functional variances.
In close consultation with the client, we expanded the search criteria to include distributors of broader non-perishable food items. This broader scope significantly increased functional comparability and geographic diversity. Our AI-driven platform swiftly identified and screened additional comparable companies across Europe, carefully assessing each company's profile to ensure high comparability.
Leveraging our proprietary AI, we systematically reviewed business descriptions, independence indicators, and websites, excluding entities with group affiliations or incomplete financial data. We incorporated client preferences and local tax authority practices, particularly excluding companies with incomplete financials across the observed years to ensure robust multi-year comparability.
Expanded from an initial 4 highly specific comparables to a robust set of 17 companies distributing non-perishable food items, enhancing defensibility.
Broadened geographic scope beyond Southern Europe, preemptively addressing potential concerns from German tax authorities regarding regional biases.
Established an operating margin range (IQR), providing clear, reliable data for transfer pricing justification.