Transfer pricing model –are cyclical updates still required?

A well-designed and up-to-date transfer pricing model is crucial for ensuring coherent tax compliance and mitigating fiscal risks. However, the dynamic nature of market conditions and even the most carefully developed transfer pricing frameworks can require periodic updates.

Why is maintaining an up-to-date transfer pricing model important?

The primary purpose of transfer pricing model is to establish a methodology for determining the remuneration for intra-group transactions. Developing such a model requires a thorough assessment of the functional profiles of related entities, including their functions, assets engaged, and risks assumed. This process requires formulation of appropriate pricing mechanisms.

Functional profiles, particularly risk allocation of the functional profiles, should adequately reflect the entities’ remuneration under intra-group flows. The up-to-date transfer pricing model ensures that each entity’s contribution to value creation aligns with its remuneration and the profit allocation within the group.

What can cause outdates?

Even the most robust transfer pricing model may require adjustments in response to:

• changes in group structure, such as the transfer of key functions, assets, or risks due to restructuring or reorganisation,
• alterations in the functional profiles of entities engaged in intra-group transactions,
• amendments to tax regulations, both domestic and international,
• local and global market factors, including inflation, shifts in demand, fluctuations in production costs, supply chain disruptions, or geopolitical crises.

What are the risks of outdated transfer pricing model?

Failure to update a transfer pricing model can result in non-compliance with tax regulations, significant financial and reputational risks. Potential consequences include:

• tax adjustments and penalties – tax authorities may challenge intra-group transactions that deviate from arm’s length conditions, leading to income reassessments and financial penalties,
• reputational damage – lack of transparency in intra-group transactions may impinge investor’s confidence and negatively impact company’s public perception.

How do the update of transfer pricing model?

The key is continuous monitoring and regular updates of conditions of intra-group transaction. This includes:

• ongoing review of agreements, functional profiles, and financial performance of particular entities under the intra-group transactions,
• updating benchmarking analyses to reflect current economic and regulatory conditions.

Given the complexity of transfer pricing compliance, partnering with a trusted tax advisor can provide stability and assurance. Our expert team offers comprehensive transfer pricing advisory services, including:

• design and implementation of transfer pricing models,
• development of formal transfer pricing policies,
• preparation of transfer pricing documentation,
• conducting benchmarking analyses,
• … and more.

We ensure tax-compliant and financially optimal services – let’s review and update your transfer pricing model today.

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