Properly managing Transfer Pricing does not depend solely on knowing the OECD Guidelines or applicable local regulations—it depends, to a large extent, on avoiding practical mistakes that are frequently repeated among multinational groups of all sizes. Based on the criteria set forth in the OECD Guidelines and audit practices observed in various countries, this article summarizes the practices that strengthen a Transfer Pricing policy and the mistakes that most commonly weaken it in the face of an audit.
Best Practices
Document in a timely and contemporaneous manner, not retrospectively. Documentation prepared at the time of the transaction—contracts, emails, projections, decision minutes—significantly strengthens the ability to demonstrate that the agreed-upon terms reflect the arm’s-length principle, unlike when that information is reconstructed years later, once the tax authority has already challenged the outcome. This applies particularly strongly to transfers of intangibles, restructurings, and any transaction whose valuation depends on future projections.
Verify that the parties’ actual conduct aligns with what was contractually agreed upon. The OECD Guidelines (Chapter I) are explicit: the contractual allocation of a risk is only respected if the party assuming it exercises effective control over it and has the financial capacity to bear it. A well-drafted contract is no substitute for a transaction that is consistent with that contract.
Substantiate the actual effort or costs behind an intra-group service. It is not enough to apply a generic market margin to a cost basis; it is necessary to demonstrate, with verifiable evidence, that the service was actually provided and that the effort expended justifies the agreed-upon compensation.
Assess whether the segmentation of operations is based on genuine economic independence. Dividing the analysis into different business segments is valid when each operates with genuinely distinct functions, assets, and risks—not when, in substance, they are part of a single value chain aimed at the same commercial objective.
Review the consistency across all of the group’s documentation. The Local File, the Master File, and the Country by Country Report must tell the same story. Discrepancies in figures between these documents—even those resulting from legitimate methodological differences in consolidation—are often among the first elements a tax authority reviews when assessing a group’s risk level.
What to Avoid
Assuming that a method worked last year and will remain the most appropriate indefinitely. Changes in the group’s structure, market conditions, or the regulations themselves—as has recently occurred in several countries in the region—can render an analysis that was defensible until recently obsolete.
Reducing the comparability analysis to fewer factors than required by the regulations. The OECD identifies five comparability factors—contractual terms, functional analysis, product or service characteristics, economic circumstances, and business strategies; simplifying the analysis to just one or two of them weakens the technical defense in the event of a challenge.
Explaining a deviation from the arm’s-length range with a generic argument. Claiming that “the market was difficult” or “the exchange rate affected the results,” without rigorously quantifying that assertion, rarely withstands serious scrutiny. The OECD requires a substantive economic analysis, not a narrative explanation without quantitative support.
Postponing the evaluation of preventive mechanisms until a contingency has already arisen. Instruments such as Advance Pricing Agreements (APAs) or cooperative compliance programs—which several tax administrations in the region are promoting—can help reduce uncertainty regarding the treatment of related-party transactions and prevent future disputes when evaluated in a timely manner. It is worth noting that APAs constitute a preventive mechanism recognized by the OECD for providing greater certainty regarding the application of the arm’s-length principle.
Treating Transfer Pricing documentation as an annual procedure isolated from the rest of the group’s tax management. Decisions regarding restructuring, intragroup financing, the transfer of intangibles, or changes in the distribution chain have direct implications for Transfer Pricing that should be evaluated at the time they are made, not at the end of the fiscal year.
At TPC Group, we assist multinational groups in developing consistent transfer pricing policies that are documented in a timely manner and aligned with the economic reality of their operations, to reduce the risk of challenges from tax authorities in the region.
Source: