Intercompany pricing policies are a critical aspect of transfer pricing, ensuring that transactions between related entities are conducted at arm’s length and comply with tax regulations. These policies help multinational enterprises (MNEs) allocate profits fairly across jurisdictions, minimizing tax risks and avoiding disputes with tax authorities.

Below, we answer the most frequently asked questions about intercompany pricing policies and their role in international taxation.

1. What are intercompany pricing policies?

Intercompany pricing policies are the rules and methodologies that multinational enterprises (MNEs) use to set prices for transactions between their related entities. These transactions can include:

• The sale of goods between subsidiaries.
• The provision of services within the group.
• The licensing of intellectual property (IP).
• Intercompany loans and financing arrangements.

These policies ensure that prices align with the arm’s length principle (ALP), meaning they are consistent with what independent entities would charge under similar conditions.

2. Why are intercompany pricing policies important?

Intercompany pricing policies are essential for:

• Compliance with tax regulations and OECD transfer pricing guidelines.
• Preventing tax avoidance, ensuring profits are taxed where they are generated.
• Avoiding penalties and tax audits by maintaining clear documentation.
• Ensuring consistency in financial reporting and operational efficiency.

Without proper policies, MNEs risk double taxation, legal disputes, and reputational damage.

3. What is the arm’s length principle (ALP)?

The arm’s length principle (ALP) is the fundamental rule for setting intercompany pricing. It requires that prices between related parties be comparable to what independent companies would agree upon in an open market.

Tax authorities worldwide use the ALP to assess whether MNEs are fairly distributing profits across different tax jurisdictions.

4. How do intercompany pricing policies prevent tax risks?

Without well-structured pricing policies, MNEs may:

• Shift profits to low-tax jurisdictions, triggering tax audits.
• Understate or overstate income, leading to tax adjustments.
• Violate local tax laws, resulting in financial penalties.

By aligning intercompany pricing with the arm’s length principle, companies can demonstrate compliance and reduce the risk of tax disputes.

5. What are the key types of intercompany transactions?

Intercompany pricing policies cover various transactions, including:

1. Sale of tangible goods – E.g., a parent company selling raw materials to a subsidiary.
2. Provision of services – E.g., a headquarters providing IT or marketing services to its branches.
3. Intellectual property (IP) licensing – E.g., a company licensing trademarks or patents to a subsidiary.
4. Intercompany loans and financing – E.g., a parent company lending funds to a subsidiary.
5. Cost-sharing arrangements – E.g., multiple entities sharing R&D expenses.

Each transaction type requires a specific transfer pricing method to ensure compliance.

6. What are the main transfer pricing methods used in intercompany pricing policies?

The OECD Transfer Pricing Guidelines outline five main methods for setting intercompany prices:

1. Comparable Uncontrolled Price (CUP) Method – Compares related-party prices with those used between unrelated parties.
2. Resale Price Method (RPM) – Determines price based on the resale margin applied by the distributor.
3. Cost Plus Method (CPM) – Sets the price by adding a markup to the costs incurred by the supplier.
4. Transactional Net Margin Method (TNMM) – Compares the net profit margin of related-party transactions to independent businesses.
5. Profit Split Method (PSM) – Allocates profits between entities based on their value contribution.

Choosing the right method depends on the nature of the transaction and available market data.

7. How do intercompany pricing policies impact financial statements?

Intercompany transactions affect key financial metrics such as:

• Revenue and expenses – The pricing of goods and services directly impacts profitability.
• Tax liabilities – Adjustments in pricing can shift taxable income across jurisdictions.
• Cash flow management – Intercompany loans and payments influence a company’s liquidity.

Properly documented policies help ensure accurate financial reporting and compliance with global accounting standards (GAAP, IFRS).

8. How do tax authorities enforce compliance with intercompany pricing?

Tax authorities monitor intercompany pricing through:

• Transfer pricing audits, where they examine related-party transactions.
• Country-by-Country Reporting (CbCR), which provides financial data on MNEs by jurisdiction.
• Mandatory Transfer Pricing Documentation (TP DOC), including Master Files and Local Files.
• Anti-avoidance rules, such as the Principal Purpose Test (PPT) under BEPS.

If tax authorities find non-compliance, they can reassess taxable income and impose penalties.

9. What are the penalties for failing to follow intercompany pricing policies?

Penalties for non-compliance vary by country but may include:

• Financial penalties for incorrect transfer pricing adjustments.
• Additional tax liabilities due to profit reallocation.
• Double taxation if profits are taxed in multiple jurisdictions.
• Legal disputes with tax authorities, leading to prolonged audits.

Maintaining proper documentation and policies is crucial to avoid these risks.

10. How does the OECD’s BEPS initiative affect intercompany pricing?

The OECD’s Base Erosion and Profit Shifting (BEPS) project introduced stricter regulations on intercompany pricing to prevent tax avoidance. Key BEPS measures include:

• BEPS Action 8-10 – Aligns transfer pricing with value creation.
• BEPS Action 13 – Requires detailed transfer pricing documentation and CbCR.
• BEPS Action 6 – Prevents treaty abuse through anti-avoidance rules like the PPT.

Many countries have adopted these measures into local tax laws, making compliance more critical than ever.

11. What role does intercompany pricing play in tax planning?

Intercompany pricing policies help companies:

• Optimize global tax efficiency while remaining compliant.
• Manage foreign exchange risks in cross-border transactions.
• Align business strategies with regulatory expectations.

However, aggressive tax planning using transfer pricing can attract regulatory scrutiny and should be carefully managed.

12. How can businesses ensure compliance with intercompany pricing policies?

To stay compliant, businesses should:

• Develop clear pricing policies that align with the arm’s length principle.
• Maintain robust documentation to support intercompany transactions.
• Conduct regular benchmarking studies to justify pricing decisions.
• Stay updated on international tax laws and OECD guidelines.
• Engage tax professionals to assess risks and ensure compliance.

Proactive compliance reduces the risk of tax audits and penalties.

13. How often should intercompany pricing policies be reviewed?

Intercompany pricing policies should be reviewed:

• Annually, to align with business changes and regulatory updates.
• When entering new markets, to ensure compliance with local laws.
• During tax audits or disputes, to defend pricing strategies.
• If financial conditions change, such as interest rate fluctuations.

Regular reviews help businesses adapt to new tax regulations and avoid compliance risks.