In the eighth of a series of articles in International Tax Review on intangibles, NERA Principal Philip de Homont and Affiliated Consultant Dr. Alexander Voegele discussed handle transfer pricing adjustments.

Many multinational groups face situations where the actual year-end financial results of individual group companies are not in line with the arm’s-length principle. This can be an issue for benchmarked ‘routine’ companies, such as distributors or contract manufacturers, but also for more complex situations with multiple entrepreneurs that participate in a profit split. These deviations can be problematic as they drastically increase the risks of tax litigation, raise the effective tax rate, and can be in conflict with commercial incentives.

There are many reasons why a company’s earnings might fall outside of the arm’s-length range, but most often this does not result from deliberately wrong transfer pricing, but from economic circumstances. The article, “Practical Treatment of Transfer Pricing Adjustments,” which appeared in the June 2016 issue of the tax magazine, discusses how companies can use adjustment payments to avoid large discrepancies in the first place.