This guide explains year-end adjustments (YEAs) in plain language: what they are, when to use them, what to consider and what to avoid.
What is a year-end adjustment?
A year-end adjustment (YEA), sometimes called a compensating adjustment, is a correction to intercompany prices or margins to bring a tested party within an agreed arm’s length range. Common tested parties are limited-risk distributors, contract manufacturers and routine service providers. YEAs can be booked through a debit or credit note, a price adjustment on specific invoices, or a lump-sum settlement that is traceable to underlying transactions.
Key idea: The adjustment should reflect what independent parties in similar circumstances could have agreed and it should be supported by contracts, calculations and a clear business rationale.
When do multinationals use YEAs?
Typical triggers include:
- A limited-risk distributor falls outside the target operating margin under TNMM due to volume, mix or price movements.
- A contract manufacturer’s mark-up deviates from the benchmark because of a different output than included in the budget or other developments.
- Intra-group service and royalty charges were based on budgets and need adjustment to actuals.
Where possible, leading groups reduce the size of YEAs by monitoring in-year performance and adjusting prices during the year.
Why YEAs matter more right now
- Pillar Two: Post-year-end adjustments that don’t flow into consolidation can create GloBE reconciliation issues or affect safe-harbour testing.
- VAT and customs (hotter in 2025): After Arcomet, expect more pointed questions about VAT in relation to year-end adjustments. For goods, customs authorities may scrutinise whether retroactive changes require duty top-ups and how to allocate them to entries (vice versa there may be a cost saving opportunity). With the tariffs developments in the US this impacts more MNEs.
- Audit focus: Large, one-sided, late YEAs that look purely tax-driven attract questions. Evidence quality and commercial logic make the difference.
Design choices that decide your risk profile
1) Form of the adjustment
Adjust price lines on invoices, issue a debit/credit note, or settle via a lump-sum. Choose the form that aligns with your VAT and customs analysis and that your ERP can support. Post-Arcomet, be precise about whether your true-up is actually remuneration for services/benefits (VAT-able) or may be outside the VAT-scope.
2) Period and timing
Aim to book before local statutory close and align both sides in the same financial year. If timing differs, record the reasons and manage FX effects transparently.
3) Characterisation
Be explicit: Your label must match facts, contracts and entries and influences amongst others VAT treatment.
4) Symmetry
Issue invoices and ensure that entries in both entities are mirrored. Keep matching documentation on both sides, including contracts, notes of explanation and working papers.
How to perform a robust year-end adjustment
Step 1: Confirm policy targets and ranges
- Identify tested parties and methods.
- Confirm the policy and margins or ranges of margins that you apply.
- Check for business changes that justify a different target within the range.
- Check if activities or events took place that should be separated from your regular TP cycle.
Step 2: Run Q3 and early Q4 previews
- Use dashboards to compare actual margins to targets.
- Decide where envisaged developments can reduce the size of any year-end true-up.
- Flag high-variance entities for deeper review.
Step 3: Choose the mechanism
- Price-based: Reprice specific transactions or periods.
- Lump-sum: One settlement linked to the period’s transaction type.
- Royalty or service true-up: Adjust based on actual usage or actual cost base (mind VAT/WHT outcomes).
Step 4: Assess indirect tax and customs
- VAT: Determine whether the YEA has VAT impact. This may depend on your approach. 2025 case law makes this topic more top-of-mind at tax authorities.
- Customs: For goods, consider whether duties need to be adjusted. Refunds on downward adjustments usually require quite some preparation.
Step 5: Book and reconcile
- Ideally book timely to avoid hassle.
- Manage FX consistently with your treasury policy.
- After bookings have been processed, check if all went well.
Step 6: Update documentation
- Intercompany agreements and appendices (if needed).
- Local file narrative, especially if something special happened.
- File relevant background information; calculations, benchmark references, invoices/notes, VAT and customs analysis, approvals and ERP reports.
Governance that prevents problems
- Policy clauses: Include explicit wording in intercompany agreements that allows compensating adjustments, sets timing, defines documentation, and addresses VAT/customs handling.
- Materiality and tolerance: Define clear bandwidths that reduce small, noise-driven YEAs and keep your audit narrative consistent.
- Quarterly monitoring: Reduce reliance on year-end by adjusting prices during the year when feasible or alternatively make adjustments regularly.
- Cross-functional sign-off: depending on how you are organized it may be required to have Tax, Finance, VAT, Customs, and Local Controllers approve larger and/or uncommon YEAs. It may help to have the approach aligned before year-end to avoid delays and last-minute discussions.
Frequent pitfalls and how to avoid them
Late, large, one-sided corrections
Fix: Monitor earlier and set an adequate policy on what to do and execute.
No link to real transactions
Fix: Reference the intercompany agreement in which you can do more explaining. Evidence the independent-party plausibility.
VAT and customs blind spots
Fix: Decide early on your approach and what to take into account in processing.
Pillar Two mismatches
Fix: Ensure YEAs are performed timely to avoid Pillar 2 mismatches.
Withholding tax surprises
Fix: If you characterise a true-up as a service or royalty, check treaty and domestic WHT rules and paperwork. In addition avoid it can be considered a dividend distribution.
FAQs
Are YEAs always acceptable to tax authorities?
There are differences between jurisdictions that are to be considered, for example this may be difficult in China. In most jurisdictions it is a relatively common approach that is taken by taxpayers. There are quite some areas where it can go wrong though, also in those jurisdictions.
Can a YEA be booked only in the parent?
Avoid one-sided entries. Book symmetrically and in the same period where possible. If timing differs due to local close, keep a clear reconciliation.
Do YEAs always affect VAT?
No, this depends on the approach and can vary on a case-by-case basis.
What if losses come from local mismanagement or exceptional events?
This is to be documented and discussed with a TP advisor how to deal with this as the approach may vary on a case-by-case basis.
How Quantera Global can help
We design and implement practical YEA frameworks that work across direct tax/transfer pricing, VAT and customs. We build monitoring dashboards, (automated) operational transfer pricing calculations specified to your situation and support in preparing relevant intercompany agreements and substantiation.
We also understand there may be limitations to what you can do within your specific setting and support in finding a solution that works for you. Reach out fast if you still want to be supported this year.
Want to Learn More?
- Contact us to talk to our team about a rapid year-end review.
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