Transfer pricing

Why moving an invoice is insufficient

Transfer pricing concerns the conditions of transactions between associated enterprises. The OECD Guidelines describe the arm’s-length principle: compare the arrangement with conditions independent parties would agree in comparable circumstances. Domestic laws determine application, thresholds, documentation and consequences.

For a founder, the relevant transactions might include management services, software development, licensing, financing, distribution or use of a brand. The fact that both companies ultimately belong to the same person does not eliminate the need to analyse what each gives and receives.

How the analysis fits together

The intercompany contract is the beginning of the review. Establish what the parties actually do, which assets they use and who controls economically significant risks. The chosen allocation of profit should follow that description. For an owner-operated group, a contract assigning a broad strategic role to one entity can be difficult to support if every relevant decision and person remains elsewhere.

Documentation has two jobs: explaining the arrangement and supporting the price. A functional analysis without an appropriate pricing method can leave a gap; a benchmark without accurate facts can measure the wrong transaction. The implementation should also show how invoices, settlements, accounting entries and any year-end adjustment follow the policy. Requirements and thresholds differ by country and taxpayer size.

Assessment sequence

This is a review framework. The applicable domestic provisions and any relevant treaty determine the result in a particular case.

Begin with the business functions

Map who develops products, acquires customers, controls significant risks, funds operations and owns or uses assets. Read the contracts alongside actual conduct. A contract assigning all commercial risk to a company with no ability to manage it raises a different question from one that reflects real authority and resources.

Take an agency with a sales business in one country and delivery staff in another. The useful analysis asks which functions are performed, what risks each enterprise controls, which costs belong to each activity and what method supports the compensation. A convenient percentage of revenue is not a substitute for that work.

Choose and document the method

The OECD framework recognises multiple methods and the importance of comparability. Which method is appropriate depends on the transaction and available evidence. A simple service arrangement and a business contributing unique intellectual property may require different approaches. There is no universal acceptable markup for all cross-border charges.

Retain intercompany agreements, functional analysis, invoices, cost allocations, comparables where relevant and calculations. Confirm local documentation thresholds and filing deadlines. Even where a formal file is not mandatory, evidence may still be needed to support a deduction, withholding treatment or the price itself.

Implement, reconcile and review

Agree how invoices are raised during the year and how results are checked against the policy. Identify who reviews material departures and whether any year-end adjustment is lawful and properly recorded. Consider VAT, customs, withholding, exchange rates and timing across both entities.

The design should also survive practical questions from the finance team and an external accountant. We can connect transfer-pricing analysis with company residence, substance and contractual implementation, using specialist local work where appropriate. Review the policy when functions, people, funding or intellectual property change, not merely when the next annual filing falls due.

Common misunderstandings

• A management fee is not justified merely because the same owner controls both companies.
• Legal title to intellectual property does not alone describe all the functions that create its return.
• A report must match the transactions actually booked and performed.