Transfer Pricing in Troubled Times

Fri May 15 16:24:38 EDT 2009
By Nihan Mert-Beydilli et al.

A topic that has attracted considerable attention in recent months has been how transfer pricing practitioners should address the serious challenges that have arisen as a result of the current economic crisis. The challenges certainly will exceed the limits of what can be managed within the transfer pricing systems currently applied by many multinational enterprises, and may well require a changed approach to transfer pricing for some of them.

In this article from Tax Management Transfer Pricing Report, the authors address two of these challenges in particular. The first is how to ensure that comparables data used for setting or testing transfer prices are appropriate in terms of both comparability and adequately reflecting economic reality for the controlled party. The second is what action, if any, is required if the controlled party's results fall below an existing arm's-length range in forecast or actual terms, or if comparables data suggests that part or all of the arm's-length range is negative.

The authors examine various ways of fine-tuning and adjusting comparable data, including the use of regression analysis. They also consider the relevance of the underlying commercial and financial relationships between related parties, whether so-called routine companies should always receive a guaranteed minimum return, and what call there is for related parties to renegotiate transfer prices. Their analysis highlights the importance of admitting flexibility into the design of transfer pricing systems to allow them to better cope with extreme economic conditions.