Independence Indicator

Definition

Independence Indicator is a classification code used in commercial databases (particularly Bureau van Dijk's Orbis and Amadeus) to identify a company's ownership structure and degree of independence from parent companies. In transfer pricing benchmarking, independence indicators filter out companies with controlling shareholders—ensuring comparable companies are truly independent and their financial results are not distorted by related-party transactions.

The Bureau van Dijk (BvD) Independence Indicator uses letter codes A through D (plus U for unknown) based on the percentage of ownership held by shareholders.

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OECD/Regulatory Reference

The OECD Transfer Pricing Guidelines (2022) require that comparables be independent—not subject to controlled transactions that would affect their profitability. The Guidelines (in Chapter III) note that identifying comparables requires a search for uncontrolled transactions whose characteristics are sufficiently similar to the controlled transaction.

While the OECD doesn't prescribe specific database indicators, the principle is clear: comparable companies must be independent parties whose results reflect arm's length market conditions.

US Treasury Regulations §1.482-1(d)(1) similarly require comparables to be "uncontrolled"—transactions or companies not influenced by related-party relationships.

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In Practice

The BvD Independence Indicator is the industry standard for screening company independence:

Standard Practice:

• Accept: A, A+, A-, B, B+
• Review carefully: B-, C
• Reject: D, U

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Example

Quantitative Screening with Independence Filter:

EuroSupply BV (C indicator) requires additional review:

• Check whether the 48% shareholder is an industrial investor (potentially acceptable) or a multinational group (potentially problematic)
• Review for intercompany transactions in financial statements
• If no evidence of related-party influence, may include with documentation

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Beyond the Indicator: Additional Independence Checks

Independence indicators are a starting point, not the final answer. Even companies with A or B ratings may have independence issues:

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Related Terms

• Comparable Companies — Entities filtered by independence
• Manual Screening — Qualitative review including independence verification
• Comparability Analysis — Process requiring independent comparables

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Further Reading

• Benchmarking Study Guide — Full benchmarking methodology

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Frequently Asked Questions

Why do independence indicators matter for transfer pricing?

Comparable companies must reflect arm's length market conditions. Companies controlled by parent entities may have intercompany transactions (management fees, royalties, financing) that distort their reported profitability. Independence indicators identify companies operating without controlling shareholders—ensuring their results represent what independent parties would achieve.

Should I always exclude companies with indicator C or D?

D should generally be excluded—these are controlled entities. C requires case-by-case review—ownership is unclear but may be acceptable. If a company with indicator C has no material related-party transactions disclosed in financial statements, it may be includable. Document your reasoning for including any C-rated company.

Can a company with indicator A still have comparability issues?

Yes. Independence indicators address ownership, not functional comparability. A company may be fully independent (indicator A) but perform different functions than your tested party. Independence is necessary but not sufficient for comparability. Both independence and functional similarity are required.

What if the database shows indicator U (unknown)?

Generally exclude U-rated companies—you can't verify they're independent. However, if the company is clearly relevant and other sources confirm independence (annual reports, regulatory filings), you may include it with documentation. Tax authorities may challenge U-rated comparables, so err on the side of caution.

Do different databases use the same independence indicators?

The BvD indicator system is specific to Bureau van Dijk databases (Orbis, Amadeus, TP Catalyst). Other databases (Compustat, OneSource) may use different ownership metrics or no standardized indicator. When using non-BvD databases, manually verify ownership structures using shareholder data fields.

How do I handle companies where ownership recently changed?

If a company was recently acquired or divested, consider whether its financial data reflects the ownership period. A company independent for 3 of 4 years in your analysis period may be acceptable—document the ownership change. If the ownership change occurred mid-year, consider whether to use only independent-period data.

Should I require the same independence indicator for all comparables?

No, but apply a consistent threshold. Most practitioners accept A and B indicators together. If you include B-rated companies, you should also include A-rated companies. Don't cherry-pick independence levels to achieve desired results. Document your acceptance criteria and apply them uniformly.