Transfer pricing refers to the prices at which goods, services and intangible assets are charged between related entities within a multinational group. It determines which share of group profit is taxed in which jurisdiction and is therefore at the centre of many tax audits.
The core principle is the arm’s length principle: intra‑group transactions must be structured as if they were concluded between independent third parties. Transfer prices that do not meet this standard can lead to income adjustments, double taxation and penalties.
Why transfer pricing matters for businesses
Transfer pricing directly affects:
- the allocation of profits and losses between group entities
- the tax base in each jurisdiction
- the effective tax rate of the entire group
With increasing internationalisation, the requirements for transparency, documentation and tax compliance are rising. Tax authorities worldwide rely on the OECD Transfer Pricing Guidelines and implement them through domestic rules such as the Foreign Tax Act, the Fiscal Code and the German Transfer Pricing Documentation Ordinance.
Key legal and regulatory framework
- arm’s length principle
- Foreign Tax Act (AStG), in particular section 1 AStG
- Fiscal Code (AO), in particular sections 90 and 162 AO
- Transfer Pricing Documentation Ordinance (GAufzV)
- German Administrative Principles on Transfer Pricing
- OECD Transfer Pricing Guidelines
- BEPS Action Plan including Country‑by‑Country Reporting
These rules make a structured transfer pricing policy and robust transfer pricing documentation indispensable.
Documentation requirements and arm’s length justification
Companies with cross‑border intra‑group transactions are subject to extensive documentation obligations. Internationally, a three‑tiered documentation approach has been established:
- Master File
- Local File
- Country‑by‑Country Report (CbCR)
Core elements of transfer pricing documentation include:
- factual description including a functional and risk analysis
- economic analysis and benchmarking study to substantiate arm’s length conditions
- description of the transfer pricing methods applied
- use of internal or external comparable data
The objective is to provide a clear arm’s length justification, demonstrating that prices, margins or profit allocations are in line with what independent parties would have agreed under comparable circumstances.
Transfer pricing methods and economic analysis
To determine and test arm’s length transfer prices, different transfer pricing methods are applied. The OECD Transfer Pricing Guidelines distinguish in particular:
-
traditional transaction methods
- comparable uncontrolled price method
- resale price method
- cost plus method
-
transactional profit methods
- profit split method
- transactional net margin method (TNMM)
The selection of the “most appropriate method” is based on an economic analysis and, in particular, on:
- the functional and risk profile of the parties involved
- the assets used, including intangibles
- the availability and quality of comparable data
- the business model and the value chain
Relevance for mid-sized groups – common pitfalls
In practice, transfer pricing in mid‑sized groups is often not given the attention it requires. Typical reasons include:
- international activities grow faster than the tax compliance framework
- intra‑group prices are based on internal cost calculations rather than arm’s length benchmarks
- missing or incomplete transfer pricing documentation
- outdated economic analyses and benchmarks
- unclear or outdated intercompany agreements
Typical pitfalls for mid‑sized groups include:
- failure to identify related parties and relevant controlled transactions
- lack of functional and risk analyses in business restructurings
- ignoring intangibles such as brands, technology and know‑how in the transfer pricing model
- insufficient preparation for tax audits with a focus on transfer pricing
- late or incomplete documentation leading to penalties
- lack of alignment between transfer pricing, tax structure and overall tax planning
Mid‑sized multinational groups are increasingly in the focus of specialised audit teams. Transfer pricing is a key tool for tax authorities to address perceived profit shifting. Without a proactive transfer pricing strategy, companies face:
- significant tax adjustments
- double taxation due to uncoordinated assessments in different jurisdictions
- time‑consuming mutual agreement and arbitration procedures
- reputational risks
Why a structured transfer pricing system is essential
A robust transfer pricing system links tax requirements with business objectives. Key elements are:
- a clear and documented transfer pricing policy
- consistent intercompany agreements
- ongoing monitoring of entity‑level profitability
- regular updates of benchmarking studies
- integration into the tax control framework
This reduces risks in tax audits, mitigates double taxation and aligns the tax structure with the business model and value chain.
How TPC supports you
We support groups with cross‑border intra‑group transactions in all key aspects of transfer pricing, including:
- analysis and design of transfer pricing structures
- development and implementation of transfer pricing policies
- preparation of Master File and Local File
- preparation of arm’s length documentation and benchmarking studies
- support in tax audits and mutual agreement procedures
- review and adjustment of intercompany agreements
On our website you will find extensive FAQ sections with further information on fundamentals, current developments and practical issues around transfer pricing.
If you would like to assess whether your current transfer prices and transfer pricing documentation meet the increasing expectations of tax authorities and the OECD Transfer Pricing Guidelines, we are happy to discuss this with you in a dedicated meeting.
