Panel Regression Model: A Tool for the Estimation of the Arm´s Length SME Profitability

Abstract

In this paper we focus on transfer pricing issues of SME with aim to propose a methodological tool in the form of panel-regression model estimating arḿs length EBIT margin of industry where SME is operating, which is based on the Action Plan of the European Commission to ensure fair and effective corporate taxation, fulfilling the premise of simplicity and non-increasing the administrative burden and compliance costs of taxation. As a result separate panel regression models were determined for each industry sectors and EU Member States based on the variables, such as operating revenues, payroll, added value and tangible fixed assets. Those regression factors are able to statistically significantly explain the variability in the generation of EBIT margin in case of SME in EU 28, which is often used for transfer pricing purposes. Panel regression models can be used as a simple methodological tool to estimate the arḿs length SME profitability in the industry sector and the state where is SME operating. Moreover, it is able to identify possible distortion of transfer prices if SME is not generating arḿs length EBIT margin based on the model.