Easy transfer pricing

Cross-border transfer pricing in multinational corporations requires profound analysis and the corresponding documentation for tax purposes. GTP Global Transfer Pricing Business Solutions shares the common understanding among international tax experts that the 'so-called' function and risk analysis is pivotal for transfer pricing documentation.

For its projects on structuring transfer pricing systems and group-wide documentation, the company has found that there is the need for some discussion and modification regarding what purpose the function and risk analysis is for, and what makes up the difference between the so-called 'routine' and 'non-routine' functions.

Transfer pricing analysis refers to pricing for the exchange of goods, services or rights under the law of obligations. It should stick to economics, rather than the stereotypes of international taxation. One such stereotype is that non-routine functions ought to receive larger profits in absolute terms, and should result in higher profitability in relative terms compared with routine functions.

The company is convinced that this 'theory' is wrong because it does not reflect business economics and economic theory. Non-routine functions receive the remains of value chains and, in times of success, this results in excess profit. In times of failure, this leads to losses or even insolvency. If one of the company's clients shows signs of excess profits or loss, then it cannot be a routine function.

GTP's observation is that most sales units in multinational groups are not routine distribution functions, but are complex units, such as local entrepreneurs. Market risks, sales volume volatilities and internal cost variations over time are usually borne by the respective sales unit. Interestingly, intra-group contracts rarely shift such risk to other related parties; for example, to the producer of the goods or a R&D unit. As a consequence, when functioning as a local entrepreneur, sales units need to be assessed by budgeted figures of profitability instead of actual figures.

It is essential to rethink the function and risk analysis to generate substance for the transfer pricing documentation.