What are the main challenges and risks of transfer pricing in a global context?

1 Market fluctuations

One of the main challenges of transfer pricing is to reflect the external market conditions and the arm's length principle, which requires that related parties transact at prices that are comparable to those of independent parties under similar circumstances. However, market conditions can change rapidly and unpredictably, affecting the supply and demand, costs, margins, and risks of different products and services. MNCs need to monitor and adjust their transfer prices accordingly, using appropriate methods and data sources, to avoid under- or over-pricing their intercompany transactions and creating distortions or inefficiencies in their operations and performance.

2 Regulatory compliance

Another major challenge of transfer pricing is to comply with the diverse and evolving tax laws and regulations of different countries where MNCs operate. Transfer pricing is a key area of scrutiny and dispute by tax authorities, who may challenge the validity and consistency of the transfer prices and impose adjustments, penalties, or litigation. MNCs need to ensure that their transfer pricing policies and procedures are aligned with the relevant tax rules and standards, such as the OECD Transfer Pricing Guidelines, and that they have adequate documentation and evidence to support their transfer pricing positions and practices. MNCs also need to be aware of the potential implications of tax treaties, anti-avoidance measures, and dispute resolution mechanisms on their transfer pricing outcomes.

3 Operational complexity

A third challenge of transfer pricing is to manage the operational complexity and coordination of intercompany transactions across multiple functions, divisions, and locations within an MNC. Transfer pricing involves not only setting prices, but also implementing, monitoring, reporting, and reconciling them among various internal and external stakeholders, such as business units, finance, accounting, tax, audit, and regulators. MNCs need to establish clear roles and responsibilities, effective communication and information systems, and robust controls and governance structures to ensure that their transfer pricing processes are accurate, efficient, and transparent. MNCs also need to consider the impact of transfer pricing on their management accounting and decision making, such as budgeting, costing, performance evaluation, and incentive schemes.

4 Ethical and reputational risks

A fourth challenge of transfer pricing is to balance the economic and strategic objectives of an MNC with the ethical and reputational risks that may arise from its transfer pricing practices. Transfer pricing can be seen as a tool for tax planning and optimization, but also as a source of tax evasion and avoidance, especially if it results in shifting profits to low-tax jurisdictions or exploiting loopholes or inconsistencies in tax rules. MNCs need to be mindful of the potential consequences of their transfer pricing policies and procedures on their social responsibility, stakeholder relations, and public image. MNCs need to adhere to the principles of transparency, fairness, and integrity in their transfer pricing activities, and to communicate their rationale and value proposition to their internal and external stakeholders.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?