Transfer Pricing Risk Management

[ By Steven Carey, Transfer Pricing Associates ]

In Box 1, lack of clarity of the business model creates misalignment between business reality and the transfer pricing system, which can mean entities are remunerated in a manner inconsistent with their function and risk profile. For example, not clearly defining roles and responsibilities and remunerating a sales agent on a cost plus basis will not be consistent with the commercial objective of maximizing sales. In such case, a commission based transfer pricing model may be more appropriate.

The risk inherent in Box 2 is that economic, legal and this can give rise to is permanent establishment risk if, for example, the sales staff are negotiating, concluding and signing contracts on behalf of an entity resident in another jurisdiction and this is not consistent with the operational or economic allocation of functions, risks and profits between those entities.

Box 3 risks are well documented and understood, consisting of penalties for not complying with transfer pricing compliance obligations.

Box 4 refers to the risk of facing a transfer pricing investigation or audit. This is obviously very disruptive to an entity, in addition to the potential penalties and interest if the audit results in a transfer pricing adjustment.

Next :
Transfer Pricing Audits and Enforcement

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