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Transfer pricing – A new application for an old principle

Transfer pricing refers to the price of goods and services that are exchanged cross border between related companies. Multinational enterprises (“MNE’s”) should establish a transfer pricing policy that ensures profits are recognised in accordance with where economic value is created. Documentation is essential to support how the profit has been allocated among the various subsidiaries within the MNE group.

Some of the elements of transfer pricing include:

  • The term “Transfer pricing” refers to the pricing of related party transactions.

  • As part of their Base Erosion and Profit Shifting (BEPS) project, the OECD examined transfer pricing.

  • By retaining the arm’s length principle, the OECD confirmed the principle that where parties are related, they should transact with each other in the same way that they would if they were not.

  • The arm’s length principle is based on the concept that the value created through underlying economic activities should be aligned with profits.

  • Reviewing transfer pricing methods, can lead to opportunities to adjust the way profits arise in different entities. Getting this right will sometimes result in tax savings.

  • Risk management and compliance are not the only aspects of robust transfer pricing. It is also about commercially focused, pro-active tax management


The OECD’s Base Erosion and Profits Shifting (BEPS) Action Plan has kickstarted great change in terms of how tax authorities assess transfer pricing, sparking governments and tax authorities around the world to begin introducing a number of recommendations, included in the BEPS Action Plan, into domestic legislation. Whilst the arm’s length principle itself is not new, it now needs to be applied in a BEPS-compliant way.

Global coherence is expected but, as yet, uptake has not been comprehensive meaning that there are timing differences in when the recommendations will be introduced, if at all. This lack of coordination presents a number of challenges to MNE’s in relation to current and future tax obligations.


The BEPS Action Plan represents the most significant change to the international corporate tax environment ever seen. For all corporates that operate internationally, and some that do not, it will present new challenges. It is important for businesses to carefully identify where they may be at risk and take appropriate action by considering the bullet points below:

  • Any organisation operating overseas e.g. foreign branches, foreign subsidiaries, foreign head offices should be reviewing transfer pricing.

  • For parties to be considered related , there needs to be an element of common control, although this will be defined differently by countries.

  • Transfer pricing can affect cross border transactions as well as domestic transactions.

  • Small, medium, and large taxpayers may be within the rules.


Purchases and sales of goods or raw materials to and from a related party.

Intercompany services to and from a related party, including head office charges and management fees (or the absence of them).

License fees and royalties (or the absence of them).

Interest charges and loans to or from related parties (or the absence of them).

Business restructures or any changes to the way business is done.


1. Do you have transactions between related parties?

Who does this affect?

Typically, medium and large sized companies but it can affect smaller businesses in certain countries.

The issue

Transfer pricing documentation is a requirement to provide support for the transfer prices that have been applied. BEPS has introduced a large-scale overhaul of these requirements. A master file and local file are necessary. The master file is required to cover the whole group at an international level. This will be capable of being shared between all relevant tax authorities. The result of this is a considerable increase in compliance risks. The local file will provide further detail with regards to related party transactions affecting that specific jurisdiction. It is critical that there is a compilation of evidence of arm’s length pricing. Merely stating a group’s compliance with the arm’s length principle presents significant risk of challenge to the business, its auditors and advisors.


Check the compliance status, review transfer pricing strategy and documentation now.

2. Do you have intra-group service transactions?

Who does this affect?

All groups with related party transactions.

The issue

Intra-group service charges are viewed as one of the leading causes of BEPS by many tax authorities. New principles for low value service charges are being introduced which may simplify documentation requirements. For high value service charges, detailed transfer pricing analysis is required to justify the economic value provided by the service.

Low – value e.g. management fees/head office charges.

High – value e.g. strategic direction and high value services.


MNE’s should review all service fees to ensure the services provided are consistent with the service fee charged and the new BEPS principles. It should be noted that tax cost sharing is still possible providing that economic substance principles are recognised and adhered to.

3. Do you have intangible assets?

Who does this affect?

Whether or not intangible assets are shown on the balance sheets, all groups with intangible assets are affected. (e.g. patents, trademarks, goodwill, brands, know-how, licenses).

The issue

The introduction of revised principles regarding the allocation of profits from intangible assets means that registered ownership will be less important in allocating profit. Instead the creation of commercial substance and economic value should be rewarded appropriately. The valuation of intangibles being transferred between connected parties is also under scrutiny.


Identify jurisdictions where control and development of intangible assets occur and review the intangible asset ownership structure.

4. Do you have to prepare country-by-country reports?

Who does this affect?

MNE’s with international related party transactions with a global turnover exceeding €750m. Smaller groups may still be expected to provide a master file and local files.

The issue

An entirely new compliance concept that is being introduced with the goal of increasing transparency so as to enable tax authorities to properly identify risk. Groups will be required to submit specified financial and tax data that is to be shared across the countries they operate in. Additionally, the EU is seeking to force groups to publish this information on their websites with the implementation of new legislation. This may give rise to significant commercial and reputational risks in addition to tax exposures.


Review information required to comply with country-by-country reporting obligations, and verify system capabilities to produce country-by-country reports.

Comply with country-by-country reporting notification obligations.

5. Do you have debt transactions?

Who does this affect?

Businesses on a medium and large scale that pay interest on debt from independent lenders or related parties.

The issue

The OCED BEPS recommendations are that there should be restrictions on tax relief for debt. This should be based on a fixed percentage of an organisations EBITDA. As a result, tax liabilities could increase significantly, especially with highly geared businesses. The recommendations include third party as well as related party debt. These prospective changes to thin capitalisation rules may have a major impact on a corporate’s tax liability.


Review how the proposed changes will impact the ability to claim tax relief for interest. Restructuring may be appropriate.



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