5 Things CFOs of Multinational Companies Need to Know About the OECD Transfer Pricing Guidelines

Although the most recent updates to the Organization for Economic Cooperation and Development (OECD) guidelines took place in 2017, some CFOs of multinational companies still don’t fully understand the implications of those changes, and how the changes affect transfer pricing at their companies.

The learning curve has grown even steeper with the business challenges created by the changing financial landscape. During periods of economic turmoil, establishing comparability is often far more difficult for companies due to a dramatic gap between typical benchmarks and the profitability of entities involved in any transfer pricing calculation.

Transfer pricing can help manage the earnings and operations of subentities, but the ideal methods used to guide transfer pricing are much different in this type of situation—and this new economic challenge only adds to the complexity that CFOs are already facing in terms of OECD guidelines and increased governmental oversight.

Effective transfer pricing in today’s business climate requires CFOs to pay close attention to the different variables affecting their transfer pricing strategies. Here are five things CFOs at multinational companies need to be aware of when it comes to transfer pricing.

1. Updated OECD guidelines offer assistance in aligning transfer pricing with value creation.

Intangible-asset transactions present a challenge when organizations are quantifying prices and profits to serve their transfer pricing models. The OECD guidelines have been updated to prevent certain transfer pricing practices that businesses have used to shift the taxable profits of intangible assets out of high-tax jurisdictions and into locales where their tax obligations can be reduced.

Although the OECD guidelines are aimed at making it harder for multinational corporations to manipulate their finances through these practices, they also offer a blueprint for how to manage intangible transfer pricing without increasing your risk of regulatory scrutiny. Recent revisions to OECD guidance recommend using value creation to improve transfer price calculations for a number of assets, including intangible assets, the allocation of risks, projected levels of return for funding, and other variables involving uncertain risk or hard-to-calculate asset value.

2. Small transactions are still liable to be audited.

Some CFOs assume that large transactions are more likely to be subjected to scrutiny according to the OECD transfer pricing guidelines. Although this may be true, smaller transactions must still adhere to these regulations.

These include transactions with small companies generating less than $25 million in annual revenue, as well as foreign-owned businesses. For businesses that fit this description, transfer pricing should be approached with the assumption that an audit will take place at some point. The likelihood of an audit, especially over time, is too great to remain uninformed just because your business doesn’t fit the typical profile of an organization that often has its transfer pricing methods audited.

In the U.S. and abroad, businesses should take a proactive approach to understanding their transfer pricing methods and making sure their strategy fits the expectations of each jurisdiction in which they operate.

3. Multinational transfer pricing should use a standardized, three-tier approach.

Even the OECD itself acknowledges that transfer pricing isn’t an exact science. Although there is flexibility in how businesses can approach transfer pricing, multinational organizations can minimize their risk by taking a standardized approach to documenting information related to any transfer pricing agreement.

The OECD recommends a standardized, three-tier structure for organizing and documenting information related to transfer pricing at a multinational company. These tiers include:

• A master file containing the highest-level information regarding the company’s multinational business operations
• A local file with information specific to the local companies involved in the transaction
• A country-by-country report (CbCR) combining additional relevant information that can be used to justify transfer pricing calculations, including income allocation, local taxes paid, and other local and multinational business activities

It’s worth noting that, although many countries have made this three-tier documentation structure a requirement for transfer pricing agreements, the United States has no such requirement. But for multinational companies doing business outside the U.S., this tiered approach is simple and ensures compliance and efficient documentation regardless of the jurisdiction in which the transfer pricing is taking place.

4. Economic volatility may require adjustments to your transfer pricing protocol.

If you’re accustomed to using the arm’s-length principle in your transfer pricing strategy, recessions may disrupt this approach. Steep recessions can result in a lack of comparable data, making the arm’s-length approach impractical for accurately pricing a transaction. But even the degree of a recession’s impact isn’t consistent from one industry to the next, which further disrupts benchmarks and the ability to account for economic disruption in your transfer pricing calculations.

Effective transfer pricing methods are critical to reducing tax obligations and preserving profit margins for multinational corporations.

In some situations, other methods, such as the transactional net margin method and resale minus method, may be required. Keep in mind that regardless of the methods or adjustments used in your calculations, each transaction is ultimately judged by facts and terms that are specific to that transfer. This is one more reason to implement tiered documentation as you undertake complex and even unprecedented adjustments to your transfer pricing method.

5. Effective benchmarking may require an approach that targets subsets of comparable transactions.

You may need to adjust your filters when finding benchmarks that can be applied to your transfer pricing rules. These can include:

• Refining comparables to eliminate transactions that were unaffected by economic conditions or other factors influencing your own transaction
• Broadening search criteria to include companies facing similar challenges, such as bankruptcy
• Eliminating highly profitable comparables that aren’t affected by the same economic distress that your company is facing
• Using both relative sales growth and absolute sales growth to filter comparables and find the most relevant comparisons

When making adjustments to your benchmarking strategy, always consider the preferences and reputation of the tax authority governing your transfer pricing agreement. Certain authorities may have different preferences or expectations when it comes to adjustments, even in a period of economic uncertainty. Your business should account for the tax authority during this process and seek out methods and adjustments that are more likely to be viewed favorably—thus reducing your scrutiny in an audit.

Recalibrate your transfer pricing process.

The past few years have seen a lot of change surrounding the OECD guidelines. At the same time, fast-evolving economic conditions around the globe are adding complexity to the transfer pricing process, testing the competence of CFOs who may be involving themselves in transfer pricing more than ever before.

Don’t wait for an audit to place your transfer pricing under the microscope. Take a proactive approach by keeping track of OECD changes, as well as local tax authority trends, to help your business navigate upcoming economic and tax-related challenges.

Looking for more transfer pricing tips? Read our post on the “Top 5 Ways to Boost Operational Transfer Pricing Effectiveness.”