Single Year vs. Multi-Year Analysis: Dynamics of Implementation and Transfer Pricing Compliance in Various Jurisdictions

In the application of the Principle of Fairness and Business Prevalence (Arm’s Length Principle), one of the technical questions that often triggers debate between Taxpayers and tax authorities is the data period used: Should we use single year data (single year) reflecting current year conditions, or multi-year average data (multi-year) to smooth out economic volatility?

The answer to this question is not uniform. Although the OECD provides general guidance, countries like Indonesia, Singapore, and Malaysia have specific approaches reflecting their domestic policies.

Global Perspective: OECD and United Nations (UN)

Globally, guidance from the Organisation for Economic Co-operation and Development (OECD) and the UN serves as the main reference. Both acknowledge the benefits of multi-year data but do not mandate it absolutely.

According to the OECD Transfer Pricing Guidelines 2022, the use of multiple year data is often useful, but it is not a systematic requirement. Multi-year data should be used if it adds value to the transfer pricing analysis.

The OECD emphasizes several key uses of multi-year data:

1. Understanding Facts and Circumstances: Past data can reveal facts influencing transfer prices, such as product life cycles or long-term economic conditions.
2. Addressing Volatility: Year-on-year comparisons (single year) can be distorted by short-term anomalies. Multi-year data helps smooth out differences caused by business or economic cycles.
3. Detecting Anomalies: Historical data helps identify whether financial results in the examined year are extraordinary events or part of a long historical pattern.

However, the OECD also warns against using hindsight (knowledge of the future). The use of multi-year data does not automatically justify the use of multiple year averages, unless it improves the reliability of the arm's length range.

In line with the OECD, the UN Manual (UN Transfer Pricing Manual 2021) states that examining multi-year data is useful to account for the effects of business cycles or product life cycles. In the context of risk assessment, analyzing profit margins over an extended period is crucial to detect intentional profit shifting.

Indonesia Approach: Measured Flexibility

Indonesia, through its latest regulations, adopts an approach aligned with the OECD but with a clear hierarchy.

Tax audit guidelines (PER-22/PJ/2013) explain that fairness testing often requires researching data from several years to address differences due to product or business cycles. This means, in Indonesia, Taxpayers are allowed to use multi-year analysis (usually a 3-year average) if they can prove that single year data is unreliable due to market volatility.

Singapore Approach: Strong Preference for Single Year

Singapore has a stricter approach compared to Indonesia regarding the use of multi-year data for final result testing.

The Singapore tax authority (IRAS) in the IRAS Transfer Pricing Guidelines (Eighth Edition) affirms that Taxpayers must test their related party transactions every year (annually) against arm's length results.

The use of multiple-year testing is only considered in exceptional circumstances. Taxpayers are advised to consult with IRAS before applying multi-year testing. Nevertheless, for qualitative analysis purposes (understanding trends), IRAS acknowledges that multi-year data is useful for identifying factors influencing transfer prices.

Malaysia Approach: Prohibition of Multi-Year Averages

Malaysia takes the firmest position regarding the use of multi-year statistical averages.

The latest guidelines, Malaysia Transfer Pricing Guidelines 2024, explicitly state that Taxpayers must not use multiple year averages. The IRBM (Inland Revenue Board of Malaysia) requires that the fairness principle be adhered to contemporaneously on a year-by-year basis.

However, similar to other jurisdictions, Malaysia still allows the use of multi-year data for qualitative analysis purposes, such as examining loss situations and understanding product life cycles.

Comparative Analysis and Implementation Strategy

When to Use Single Year Analysis?

• Malaysia: Mandatory for final price/margin determination.
• Singapore: Mandatory as a standard for annual routine compliance.
• Indonesia: Used as the base standard (default), especially if comparable data is available and stable.

When to Use Multi-Year Analysis?

• Trend & Risk Analysis (All Countries): 3-5 year data is crucial for qualitative analysis to explain losses or industry trends.
• Arm's Length Range Determination (Indonesia & OECD): The weighted average technique is often accepted if the Taxpayer proves the industry is volatile to mitigate the impact of single-year anomalies.

The debate between single year and multi-year analysis is not about choosing one "universally correct" method, but understanding the preference of the local tax authority. While the OECD and Indonesia provide room for flexibility for multi-year averages to improve comparability, Singapore and Malaysia tighten rules by requiring single-year based testing for final results. Taxpayers must adapt their documentation strategies: using single year data for compliance in Malaysia and Singapore, while utilizing multi-year flexibility in Indonesia if economic conditions demand it.

References

1. OECD. (2022). OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022. OECD Publishing, Paris.
2. United Nations. (2021). Practical Manual on Transfer Pricing for Developing Countries (2021).
3. Ministry of Finance of the Republic of Indonesia. (2023). Regulation of the Minister of Finance of the Republic of Indonesia Number 172 of 2023 concerning the Application of the Principle of Fairness and Business Prevalence in Transactions Influenced by a Special Relationship.
4. Directorate General of Taxes. (2013). Regulation of the Director General of Taxes Number PER-22/PJ/2013 concerning Guidelines for Audit of Taxpayers Having a Special Relationship.
5. Inland Revenue Board of Malaysia. (2024). Malaysia Transfer Pricing Guidelines 2024.
6. Inland Revenue Authority of Singapore. (2025). IRAS Transfer Pricing Guidelines (Eighth Edition) (2025).