Before You Start

This guide assumes knowledge of your company’s organizational structure and existing intercompany transaction flows.

Overview

50 min
Estimated Read Time
Expert
Difficulty
Annual
Review Frequency

What You’ll Learn

  • The core principles and importance of transfer pricing
  • Common transfer pricing methodologies (CUP, Resale Price, Cost Plus, Profit Split, TNMM)
  • Key components of robust transfer pricing documentation
  • Strategies for managing intercompany agreements and compliance risks

1. Preparation Steps

Establishing a solid foundation is crucial for defensible transfer pricing. Gather the following information:

Essential Data Points

  • Organizational chart of related entities
  • Description of all intercompany transactions (goods, services, intangibles, financing)
  • Functional analysis of each entity (assets, functions, risks)
  • Existing intercompany agreements

Helpful Data Points

  • Industry benchmarks for similar transactions
  • Financial statements of all related parties
  • Market research reports for comparable uncontrolled prices

2. Understanding Key Methodologies

Selecting the appropriate transfer pricing methodology is paramount for compliance and audit defense. Here are common approaches:

Method A: Comparable Uncontrolled Price (CUP) Method

Compares the price of an intercompany transaction to a comparable transaction between independent parties.

Pros:
  • Direct and robust when good comparables exist.
  • Highly defensible if truly comparable.
  • Preferred by tax authorities.
Cons:
  • Difficult to find truly comparable transactions.
  • Requires detailed functional analysis.
  • Market differences can complicate application.

Method B: Cost Plus Method

Adds an appropriate markup to the costs incurred by the supplier in an intercompany transaction.

Expert Tip: For routine service providers or manufacturers, the Cost Plus method is often practical. Ensure the markup is justified by market comparables and functional analysis, not just internal targets.

3. Establishing Your Transfer Pricing Policy

A robust transfer pricing policy typically outlines the following key elements:

{
  "policy_id": "TP-POL-2025-001",
  "effective_date": "2025-01-01",
  "scope": "All intercompany transactions",
  "methodologies_applied": [
    { "transaction_type": "Intercompany Sales of Goods", "method": "Resale Price Method" },
    { "transaction_type": "Intragroup Services", "method": "Cost Plus Method" }
  ],
  "arm_length_principle_statement": "All transactions between related parties shall be conducted at arm's length.",
  "documentation_requirements": "Annual TP documentation report, intercompany agreements."
}

4. Key Components of Transfer Pricing Documentation

  1. 1

    Company Overview & Business Strategy

    Provide a general description of the MNE group, its business, and its overall strategy.

  2. 2

    Detailed Functional Analysis

    Document the functions performed, assets used, and risks assumed by each related entity involved in intercompany transactions.

  3. 3

    Methodology Selection & Justification

    Explain the chosen transfer pricing method for each transaction type and justify why it is the most appropriate.

Critical Consideration: Arm’s Length Principle

All transfer prices must adhere to the arm’s length principle, meaning transactions between related parties should be priced as if they occurred between independent parties.

5. Maintaining Compliance and Documentation

Annual Compliance Checklist

  • Review and update transfer pricing policies annually or upon significant business changes.
  • Ensure all intercompany agreements are legally executed and consistent with policies.
  • Prepare and submit robust transfer pricing documentation by tax deadlines.
  • Monitor financial results to ensure arm’s length outcomes are achieved.

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