Complexity is subject to the business model and not a matter of scale
Many hidden champions are still significantly smaller than the multinationals that usually face transfer pricing challenges. Being smaller does not generally mean less complex. Such groups often command significant know how and spread their value / supply chains across various countries to properly serve their customers. Complexity is subject to the business models, the management and decision processes, and the intangibles involved rather than a matter of scale.
Trigger points for transfer pricing audits are among many others:
- significant domestic loss carry-forwards;
- foreign operations more profitable than the domestic activities;
- major changes in both, functions performed, assets employed and risks assumed.
Flexibility and flat hierarchies may turn into a disadvantage
Such mostly privately held businesses usually benefit from flat hierarchies and significant flexibility in taking innovations to the markets and in adjusting to ever changing market/customer requirements. More often than not, these advantages come with some downsides particularly with respect to transfer pricing:
- the reasons for major decisions are not timely documented;
- identifying intercompany transaction flows and the associated terms and conditions long after the facts is time consuming and error-prone;
- since not all jurisdictions require submission of a transfer pricing documentation as part of the annual tax return filing the documentation is delayed without immediate disadvantages.
Transfer pricing not just an administrative burden
Is transfer pricing an administrative burden? Yes, it definitely is. Is there more value in transfer pricing than an insurance premium? It depends – economic analysis done for the bookshelf to be dug out as and when required is of very limited value. However, actively drawing lessons learned from the economic analysis may lead to a better understanding of value chain related opportunities and risk and improve entrepreneurial decision taking substantially.
