In this blog, we discuss what operational transfer pricing means and consider what proactive measures are required to achieve arm’s length results as the global trade war intensifies.
What is operational transfer pricing?
In an ever-evolving tax environment, multinational groups must remain active to ensure compliance with transfer pricing regulations and laws. The main starting point for transfer pricing is the arm’s length principle, according to which transactions between Group companies must be subject to the same pricing and other terms and conditions as would be applied in similar circumstances between independent parties. However, achieving arm’s length results does not happen by itself, but requires proactive and real-time actions and adaptation to changing business conditions. Efficient and up-to-date operational transfer pricing (OTP) is a key factor achieving this.
Seeing transfer pricing only as a compliance obligation is quite typical. Instead of keeping the focus only on documenting financial years that have already ended and updating benchmark analyses, operative transfer pricing brings transfer pricing policy into daily practice by focusing on the implementation of transfer pricing and continuous real-time monitoring. Therefore, OTP aims to bridge the gap between the set transfer pricing policy and its practical implementation and to ensure that the transfer pricing policy is reflected in the financial statements of the Group companies in the right way. The OTP covers, among other things, setting sales prices, budgeting and forecasting, adjusting sales prices and reporting to internal and external stakeholders. It integrates transfer pricing principles into the company’s financial and operational processes. By adjusting the pricing of intra-group transactions as part of changes in the operating environment, companies can reduce tax risks and improve financial predictability, among other things.
The importance of operative transfer pricing in guaranteeing an arm’s length outcome
The arm’s length principle aims to ensure that intra-group transactions are priced at arm’s length, which ultimately leads to a fair distribution of taxing rights between the multinational group’s operating countries. OTP implements this principle by incorporating real-time adjustments and controls into financial reporting systems, which reduces unpleasant surprises and, for example, large transfer pricing adjustment needs at the end of the year.
When implemented well, operational transfer pricing promotes the following:
Real-time adjustments
- Global markets are unpredictable. For example, inflation, exchange rate fluctuations and geopolitical risks (e.g. tariffs) affect profitability and cost structures. Dynamic (and automated) pricing changes ensure that business-to-business transactions remain within agreed profit margins throughout the year. Large quarterly or year-end transfer pricing adjustments can indicate loose control or create undesirable outcomes from a tax, customs or VAT perspective.
Alignment with business
- With OTP, transfer pricing practices reflect actual business models, cost structures, and supply chain realities. Real-time monitoring helps companies make better decisions and optimize tax structures while staying aligned with strategic business goals.
Minimizing tax risks
- By managing and monitoring pricing inconsistencies, companies can reduce the likelihood of tax disputes, fines and audits. Tax authorities are also paying more and more attention to how transfer prices are set, and not just to the end result of pricing. With consistent implementation of intra-group pricing, companies can maintain transparency towards tax authorities.
In order to implement effective operational transfer pricing, pay attention to at least the following measures:
- Take advantage of automated systems and analytical tools to process real-time data.
- Set up clear pricing policies that align with both your business goals and tax regulatory requirements.
- Encourage collaboration across tax, finance, and business units to ensure seamless pricing implementation.
- Regularly monitor and adjust pricing practices to reflect changing business models and operating environments.
ARM’s length results are achieved through a dynamic process
Achieving arm’s length results is not a one-off exercise, but a dynamic process that requires constant monitoring and adjustments. Companies that adopt a proactive OTP approach can improve tax compliance, reduce risk, and improve overall financial efficiency. In a global tax environment, operational transfer pricing must evolve in parallel with the business and regulatory environment to ensure sustainable success. Due to the intensified trade war, now is a critical time to examine the effects of the tariff changes on the Group’s value chain and the pricing of goods trade. At worst, increased customs duties can suffocate the subsidiary’s operating conditions in a pricing model that is not suitable for the situation.
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