A Checklist for Managing Your Transfer Pricing Strategy

Sowmya Varadharajan

A checklist for expanding your transfer pricing strategy

Don’t get caught off guard by transfer pricing surprises. Review these six categories as you assess your approach to transfer pricing.

Globalization has made transfer pricing a critical part of doing business for many organizations today. For many companies, their transfer pricing approach is limited to compliance – producing documentation to satisfy tax authorities. While compliance exercises might check the regulatory box, they do not amount to a strategy. By adopting such a limited approach, companies could be overlooking opportunities to optimize tax outcomes, improve cash flow, and align transfer pricing with broader business objectives.

To understand how your organization could benefit from a more robust transfer pricing strategy while still meeting compliance requirements, it’s critical to identify your end goals and determine the steps needed to achieve them. Here are six areas that should be on your checklist as you take a broader view of transfer pricing beyond compliance.

1. Gather key transfer pricing reference materials

These items might include:

Organizational and personnel charts
Financial statements for group members, as relevant
Summaries of related-party transactions (such as workpapers for Form 5472, "Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business")
Transfer pricing reports, benchmarking sets, memoranda, and provision analyses
Intercompany legal agreements
Price lists for tangible goods
Local statutory filings (such as country-by-country reports)

Note: This is not an exhaustive list and can include other items as applicable.

2. Clearly identify your transaction types

Transfer pricing applies across many different transaction types, commonly including:

Sale and purchase of tangible goods
Licensing intangible property, including cost-sharing arrangements
Provision and receipt of services
Financial transactions (like loans and cash pooling)

Note: The type of transfer pricing analysis you undertake should depend on the nature of the intercompany transaction.

3. Consider the documentation you need – and what it should accomplish

Here are five things to consider when preparing accurate and compliant transfer pricing documentation:

Scope: The extent and coverage of the information included in the documentation.
Depth: The quality of the analysis and how comprehensive it is.
Consistency: The consistency of the story across jurisdictions, across multiple tax years, and with reference to other available documentation.
Economic substance: The alignment of transfer pricing policies and practices with the actual economic activity taking place.
Process: Clear policies and procedures in place for documenting related-party transactions.

4. Monitor and make the right adjustments to arrive at the right price

Effective transfer pricing requires ongoing oversight and timely adjustments. Key elements include:

Transfer pricing reports and benchmarking updates
Formally documented procedures and policies
Detailed intercompany agreements with clear terms
Segmented financial information with adjustments booked

5. Align transfer pricing with operational and strategic objectives

Many companies fail to integrate transfer pricing into strategic decision-making processes. Consider:

How transfer pricing impacts the location of functions, people, and risks
The tax and operational implications of supply chain restructuring, intellectual property migration, or outsourcing
Whether transfer pricing supports or hinders M&A activity
The ability to model intercompany scenarios as part of budgeting, forecasting, or strategic planning

A checklist for managing your transfer pricing strategy

6. Prepare to defend your transfer pricing policies

Market volatility in recent years, such as supply chain challenges, global conflict, and increases in inflation and interest rates, has required some companies to deviate from existing transfer pricing policies.

When deviations occur, you need to be able to justify them. That includes rigorous analyses around anomalies and thorough documentation to explain why a particular situation warranted a different approach.

It’s worth noting that including every transaction in transfer pricing documentation can be costly and excessive. Think about the materiality of intercompany transactions, as well as the value of this information to your business, as you consider what to include in your documentation.

This article was originally published on Sept. 19, 2023, and was reviewed and updated.

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