Managing Transfer Pricing Risk in Structures
Transfer pricing isn't just a compliance obligation; it's a strategic issue that determines which country taxes an international group's profit.
The core logic of the arm's length principle
The arm's length principle requires that transactions between companies within the same group (goods sales, services, licensing, loans) be priced equivalent to what independent parties would agree.
Failing to follow this principle lets a country's tax authority reprice the transaction and typically assess additional tax and penalties.
The double taxation risk
The most frustrating outcome of a transfer pricing dispute is the same income getting taxed in two countries at once; one country adjusts the price and collects additional tax, while the other country may not automatically recognize that adjustment.
Mechanisms such as a mutual agreement procedure or an advance pricing agreement can be used to reduce this risk.
The importance of documentation standards
The three-tier documentation standard based on OECD guidelines (master file, local file, country-by-country reporting) has now become mandatory in most large economies; missing this documentation alone can create penalty risk.
A well-prepared transfer pricing file provides ready answers to a tax authority's initial questions in an audit, preventing the process from dragging on.
The value of advance pricing agreements
An advance pricing agreement (APA) lets a company agree with the tax authority in advance on the pricing methodology to be accepted for a specific transaction type; this substantially reduces future dispute risk.
The APA process is typically long and costly, so it's usually reserved for high-volume or high-risk intra-group transactions.
The difficulty of pricing intangible assets
Determining the arm's-length price for transferring or licensing intangible assets like brands, patents, or know-how within a group is far more complex than for tangible goods, since a directly comparable market price usually doesn't exist.
That's why intangible asset transactions are among the areas most frequently challenged in tax authority audits and require specialized valuation expertise.
International Structuring CapabilityIn transactions where capital crosses borders we build the structure with each jurisdiction's realities in view and the exit route defined from the outset.
Learn moreFrequently asked questions
Which companies are required to prepare transfer pricing documentation?
In most countries, multinational group companies above a certain revenue or transaction volume threshold; thresholds vary by country.
How many years does an advance pricing agreement last?
Typically three to five years; it needs to be renewed once that period ends.
How is a transfer pricing dispute resolved?
Usually through internal appeal processes, a mutual agreement procedure, or in some cases arbitration.
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