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How can you manage transfer pricing in M&A transactions?

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Transfer pricing is the practice of setting the prices of goods and services exchanged between related entities within a multinational group. It can have a significant impact on the tax liabilities, profitability, and valuation of each entity involved in a merger and acquisition (M&A) transaction. Therefore, managing transfer pricing in M&A transactions is crucial to avoid disputes with tax authorities, align the interests of the parties, and optimize the deal structure. Here are some tips on how to do it effectively.

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Biju Pallickal Thomas

Head of Tax- Group Transfer Pricing and Tax Operations
Ajit Jain

Partner at AJMS LG | LinkedIn top Voice in Transfer Pricing | 13 years of experience in India, ME (PwC) and UK (KPMG…
Bhavya Bansal Goyal

CA | LLB | ADIT | Certified Commercial Mediator | Founder BBG Tax & Legal- International Tax & Transfer Pricing…

1 Understand the transfer pricing policies

Before entering an M&A transaction, you should understand the transfer pricing policies of both the buyer and the seller, and how they affect the financial performance and tax position of each entity. You should also review the transfer pricing documentation and compliance history of the seller, and identify any potential risks or exposures that may arise from the transaction. For example, if the seller has been using aggressive or inconsistent transfer pricing methods, you may need to adjust the purchase price or allocate more funds for tax contingencies.

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Ajit Jain

Partner at AJMS LG | LinkedIn top Voice in Transfer Pricing | 13 years of experience in India, ME (PwC) and UK (KPMG London) | Author NRI MiTRA | ICAI Int. Research awardee | DITT UK | 27K+ Network
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It's critical to follow fundamentals of transfer pricing and conduct thorough due diligence on the target's transfer arrangements and policies. Ensure alignment with OECD Guidelines and local laws. This involves evaluating intra-group transactions for arm's length compliance, utilizing advanced pricing agreements (APAs) for certainty, and re-examining the TP policies post-acquisition to minimize tax risks and optimize efficiency. A strategic, substance-focused approach during integration ensures seamless alignment and risk mitigation.

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2 Evaluate the synergies and value drivers

Another important aspect of managing transfer pricing in M&A transactions is to evaluate the synergies and value drivers that the transaction will create, and how they will be reflected in the transfer pricing arrangements. For example, if the transaction will result in cost savings, increased market share, or enhanced intangible assets, you should consider how these factors will affect the arm's length prices of the intercompany transactions, and how they will be allocated among the entities. You should also consider the impact of the transaction on the functional and risk profiles of the entities, and whether they will require any changes in the transfer pricing policies or methods.

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Biju Pallickal Thomas

Head of Tax- Group Transfer Pricing and Tax Operations
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Aligning the benefits arising out of the synergies to the value creation involves a careful consideration of the decisions and business strategy underlying the transaction. These need to be factored into the pricing of future inter-company transactions. There may be also considerations relating to exit taxes and VAT. Reallocation of the key people functions and key risks pursuant to the transaction would often require a thorough functional analysis and even a change in the TP method.

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3 Align the transfer pricing strategy with the deal structure

The deal structure of an M&A transaction can also influence the transfer pricing outcomes and implications. For instance, if the transaction involves a share purchase, the existing transfer pricing policies and agreements of the seller will generally continue to apply, unless they are modified or terminated by the parties. However, if the transaction involves an asset purchase, the buyer may need to establish new transfer pricing policies and agreements for the acquired assets, and determine their fair market value for tax purposes. Therefore, you should align your transfer pricing strategy with the deal structure, and assess the advantages and disadvantages of each option.

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Sanjeev Gupta

Corporate Tax, International Tax-Transfer Pricing Dispute Resolution Expert and BEPS Consultant ( Ex PwC, KPMG and EY)
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The most common issue, which crops up is the treatment of intangible cost arising out of the acquisition. (a) If the entire deal has been negotiated by the head quarter and acquisition is done at local/ geographical level through the group companies present in that geography, the most common challenge is why that group company/ subsidiary should bear the intangible cost. (b) If the group company/ subsidiary is rendering some services to other group companies/ head quarter and bills under cost plus model. Should group company/ subsidiary include the amortization of intangible created in the books on account of M&A inits cost base.

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4 Communicate and coordinate with the stakeholders

Managing transfer pricing in M&A transactions requires effective communication and coordination with various stakeholders, such as the management teams, the tax advisors, the auditors, and the regulators. You should communicate your transfer pricing objectives and expectations to the relevant parties, and seek their input and feedback. You should also coordinate your transfer pricing actions and decisions with the other aspects of the transaction, such as the due diligence, the valuation, the integration, and the post-merger reporting. By doing so, you can ensure a smooth and successful transaction, and avoid any surprises or conflicts.

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5 Monitor and update the transfer pricing policies

Finally, you should monitor and update your transfer pricing policies after the completion of the transaction, to reflect the changes in the business environment, the market conditions, and the tax regulations. You should also maintain adequate and consistent transfer pricing documentation, and comply with the reporting and disclosure requirements of the jurisdictions where you operate. By doing so, you can reduce the risk of transfer pricing disputes, audits, and adjustments, and support your transfer pricing positions in case of any challenges.

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Bhavya Bansal Goyal

CA | LLB | ADIT | Certified Commercial Mediator | Founder BBG Tax & Legal- International Tax & Transfer Pricing (Advisory,Compliance & Litigation) focused firm I ADIT Coach| Direct Tax litigation
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It is very important to document the entity characterisation as well as the functional and risk analysis pre and post the merger/business restructuring. The documentation must be substantiated with proper agreements, backs ups as proof of the actual substance and support the commercial rationality of the transaction.

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6 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?

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How can you manage transfer pricing in M&A transactions?

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1 Understand the transfer pricing policies

2 Evaluate the synergies and value drivers

3 Align the transfer pricing strategy with the deal structure

4 Communicate and coordinate with the stakeholders

5 Monitor and update the transfer pricing policies

6 Here’s what else to consider

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