Transfer Pricing Monitor: November 6, 2014

Technical Transfer Pricing Tip

Can there be different transfer pricing policies between different related parties for a similar transaction? Does this change with the OECD revised transfer pricing documentation standard? 

A consistent transfer pricing policy occurs when the identical policy is followed for similar transactions with multiple related parties. It is also ideal that the transfer pricing policy between related parties is the same as the pricing policy with third parties. Undeniably, transfer pricing documentation that details a globally consistent transfer pricing policy looks clean and likely gives a multinational enterprise a certain level of comfort. When the transfer pricing policies are not consistent, the transfer pricing compliance takes on a greater degree of complexity. This situation is not always comforting.

With the trend for increased global transparency, evident from the new documentation chapter in the OECD guidelines, will there be an added incentive for consistency in transfer pricing policies? No.

There will be circumstances where a multinational enterprise is justified in having inconsistent transfer pricing policies. For instance, a subsidiary in Country A may be a start-up operation that has been operating for less than 5 years. This subsidiary has a primary scope and responsibility to represent the product it is reselling or the service it is performing. This subsidiary has the primary objective to maximize revenue and raise local market awareness. At the same time, a subsidiary in Country B may have been a recent acquisition. It already has a sizable market share as well as a full personnel infrastructure from accounting to research to development to customer service to various other departments of the business. The subsidiary in Country B has the primary objective to maximize profit, not revenue. These two subsidiaries have different strengths and capabilities and different critical success factors which influence the transfer pricing policy.

Another way of looking at the consistency issue is through the arm’s length principle. That is, does a company have different prices and policies for different customers? Even if these customers act as resellers on a wholesale basis? Obviously, the answer is yes. Different customers have different negotiating power, and the negotiation power of customers is directly proportional to their market share and value of their market intangibles.

Even though a consistent global transfer pricing policy may appear strong, especially under the Master file standard, such a policy may not be, in fact, reflective of an arm’s length terms and conditions. Arguably, with more detail on the local file component of the documentation, the master file actually helps present inconsistent transfer pricing policies. That is, there is no need for the subsidiary in Country B to detail or describe the transfer pricing policy that the subsidiary in Country A is following in the local file for Country B. However, if a tax authority challenges the difference in profit per employee that can be calculated from the country-by-country template in the revised OECD transfer pricing documentation standards, the factors and considerations for the different transfer pricing policy would be available.