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    Sharing Transfer Pricing knowledge

    Frequently Asked Questions

    At Quantera Global, we believe that sharing knowledge is essential. The perfect way to demonstrate our beliefs is through the establishment of the QG Academy. The QG Academy was created to share transfer pricing knowledge and build relationships. At our academy, we not only give webinars and offer videos on various topics, but we also give the answers to your most frequently asked questions on transfer pricing.

    Transfer pricing questions
    Below, we have published an overview of the most Frequently Asked Questions on the basic principles of transfer pricing and more technical questions on specific transfer pricing topics. Examples of transfer pricing questions we answer are:

    • What is transfer pricing?
    • When does transfer pricing become relevant? (Perhaps transfer pricing is relevant to your company.)
    • What happens if my transfer pricing is incorrect?

    Only general?
    Our FAQ are mostly about general subjects. However, you might have transfer pricing questions on more specific topics such as cash pools or compliance strategy. Please refer to our website for more information. On Our services webpage we explain more about these specific transfer pricing topics.


    Below we have listed the most frequently asked general transfer pricing questions.

    1. What is transfer pricing?

    Transfer pricing is the area of taxation that deals with the pricing of transactions between enterprises under common ownership or control (associated enterprises). Transactions are for example the sale of goods, the provision of services, the use of intellectual property or the provision of financial transactions. The price for such transactions between associated enterprises must be comparable to what independent enterprises would agree upon.

    2. What are associated enterprises?

    Transfer pricing is relevant for transactions between associated enterprises. In general, enterprises can be associated for two reasons:

    • An enterprise participates directly or indirectly in the management, control, or capital of another enterprise; or
    • The same person participates directly or indirectly in the management, control or capital of both enterprises.

    3. What is the arm's length principle?

    The arm’s length principle focuses on pricing the transaction between associated enterprises on market conditions. It says that transactions should be priced as if they had been carried out by independent enterprises under comparable circumstances. Market forces ensure that the price between independent enterprises is an arm’s length price.

    The arm’s length principle forms the basis of international transfer pricing rules and is incorporated in most bilateral tax treaties.

    4. When does transfer pricing become relevant?

    Transfer pricing is relevant for each transaction between associated enterprises. In most countries substantiation of the arm’s length conditions of these transactions is required by law. In general, this relates to both domestic and cross-border transactions. The relevance of transfer pricing however increases in case of cross-border transactions with a certain materiality. This should be analysed on a case-by-case basis.

    5. What happens when my transfer price is not correct?

    Incorrect transfer prices can lead to tax disputes and can be corrected by tax authorities. These corrections can create a risk of double taxation when they are not followed by tax authorities in other jurisdictions.

    Moreover, transfer pricing should support the business of a company. Incorrect transfer prices may however lead to distortions or inefficiencies of the business. This can be prevented by a careful consideration of transfer prices.

    If the transfer price is set incorrect on purpose, penalties may be imposed. This is also the case if insufficient or none transfer pricing documentation is prepared were required by law. In addition, non-compliance may also result in a reversal of the burden of proof.

    6. What are the OECD Transfer Pricing Guidelines?

    The OECD Transfer Pricing Guidelines are the internationally accepted standard for transfer pricing. The OECD Transfer Pricing Guidelines provide guidance for taxpayers and tax authorities on the application of the arm’s length principle. Most countries follow the OECD Transfer Pricing Guidelines in their interpretation of transfer pricing rules. Some variations between countries may however exist.

    7. How do you determine a transfer price?

    As transfer pricing is not an exact science there is no one size fits all approach for determining a transfer price. The basis of transfer pricing is to make a comparison with transactions between independent enterprises in comparable circumstances. In practice, this comparison can be a challenge.

    A typical process for determining a transfer price can be summarized as follows:

    1. Broad-based analysis of the taxpayer’s circumstances;
    2. Review of available intercompany agreements;
    3. Understanding the intercompany transactions based on an analysis of the functions performed, risks assumed and assets used (functional analysis);
    4. Review of internal comparables and/or external comparables (if available);
    5. Selection of the transfer pricing method;
    6. Identification of potential comparables;
    7. Determination of comparability adjustments (if needed); and
    8. Interpretation of data to determine the arm’s length transfer price.

    8. How important are intercompany agreements?

    Intercompany agreements are the starting point of the transfer pricing analysis. Intercompany agreements might however not always cover all the relevant aspects for a transfer pricing analysis. Transfer pricing analyses focus on the actual conduct of the respective associated enterprises. If the actual conduct of these enterprises deviates from what was agreed upon in the agreements, the actual conduct will be the subject of the transfer pricing analysis. For the burden of proof, it is recommendable to have an intercompany agreement in place and to align this agreement with the actual conduct of the respective associated enterprises.

    9. What is a functional analysis?

    In a functional analysis the economically significant activities and responsibilities are identified by analysing the functions performed, assets used and risks assumed by the associated enterprises in the transaction. This analysis is performed in order to obtain an accurate understanding of what the enterprises actually do and the capabilities they provide.

    • Functions performed

    By analysing the functions performed it is important to obtain an understanding of how value is created by the group as a whole, the interdependencies of the functions performed by the associated enterprises with the rest of the group, and the contribution that the associated enterprises make to that value creation.

    • Assets used

    In a functional analysis attention should also be paid to the type of assets used by the associated enterprises. These assets can either be tangible, intangible, or financial. Such analysis includes a consideration of the nature of the assets used, such as market value, location or protection rights available.

    • Risks assumed

    An important aspect of the functional analysis is the identification of material risks assumed by each enterprise in the transaction as the actual assumption of risk affects the price and other conditions of the transaction. The determination which associated enterprise bears a particular risk requires a careful analysis. The identification of the risks assumed can be a challenge.

    10. What are transfer pricing methods?

    Transfer pricing methods are used to establish an arm’s length transfer price for intercompany transactions. The methods are used to examine whether the conditions imposed in the commercial or financial relations between group enterprises are consistent with the arm’s length principle. The following five transfer pricing methods can be distinguished:

    • Comparable uncontrolled price method (CUP)

    The CUP method compares the price charged for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. A comparable uncontrolled transaction may either be internal (between an associated enterprise and an independent enterprise) or external (between two independent enterprises).

    • Resale price method

    The Resale price method starts with the price at which a product that has been purchased from a related party is resold to an unrelated party. This price is then reduced by an appropriate gross margin representing the amount out of which the reseller would seek to cover its selling and other operating expenses and make an appropriate profit.

    • Cost plus method

    The Cost plus method starts with the costs incurred by the supplier of property (or services) in a controlled transaction. An appropriate cost plus mark-up is added to this cost, to make an appropriate profit in light of the functions performed (taking into account assets used and risks assumed) and the market conditions. What is arrived at after adding the cost plus mark up to the above costs may be regarded as an arm’s length price of the original controlled transaction.

    • Transactional net margin method (TNMM)

    The TNMM examines the net profit margin relative to an appropriate base (e.g. costs, sales, assets) that a taxpayer realises from a controlled transaction.

    • Transactional profit split method

    The Profit split method determines the division of profits that independent enterprises would have expected to realize from engaging in the transaction or transactions. It first identifies the profit to be split for the associated enterprises from the transactions in which the associated enterprises are engaged. It then splits those profits between the associated enterprises on an economically valid basis.

    11. What is a comparability analysis?

    A comparability analysis is a comparison of a transaction between associated enterprises with a transaction or transactions between independent enterprises. These transactions are comparable if there are no differences between the two transactions that could materially affect the pricing. If adjustments can be made to eliminate these material differences, the transaction may also be considered comparable.

    12. What is a transfer pricing audit?

    Based on an assessment of the information available, tax authorities make an informed decision about whether to start an audit. During an audit, tax authorities perform a transfer pricing analysis to determine whether the transfer pricing applied by the associated enterprises is at arm’s length. If the tax authorities are of the opinion that the transfer price applied is not at arm’s length,  transfer pricing adjustments can be made to correct the price.

    13. What are transfer pricing adjustments?

    Transfer pricing adjustments are corrections of the transfer price applied between associated enterprises to comply with the arm’s length principle. In general, there are three types of adjustments:

    • Primary adjustment: an adjustment that a tax authority in a tax jurisdiction makes to a taxpayer’s transfer price (i.e. taxable profit) as a result of applying the arm’s length principle to transactions involving an associated enterprise in another tax jurisdiction.
    • Corresponding adjustment: an adjustment to the tax liability of an enterprise by the tax authority of that jurisdiction, corresponding to the primary adjustment made by the tax authority in another jurisdiction. This ensures that the allocation of profits by the two jurisdictions is consistent.
    • Secondary adjustment: an adjustment that arises from imposing tax on a secondary transaction.

    14. What are Advance Pricing Agreements (APAs) and Advance Tax Rulings (ATRs)?

    In order to mitigate the risk for transfer pricing disputes, taxpayers can agree with tax authorities upfront on the transfer price. This provides taxpayers with certainty in advance on the transfer pricing consequences in future years. Such an agreement between a taxpayer and tax authorities is called Advance Pricing Agreement (APA). APAs are concluded for multiple years and can be unilateral, bilateral or multilateral. The procedures for obtaining an APA may differ per country.

    15. What is BEPS?

    BEPS is OECD/G20’s action plan to address base erosion and profit shifting. The BEPS-project consists of 15 actions to equip governments with domestic and international rules and instruments to address tax avoidance, ensuring that profits are taxed where economic activities generating the profits are performed and where value is created.

    The impact of the BEPS-project on the transfer pricing landscape is significant. In 2017, the OECD Transfer Pricing Guidelines were updated to reflect the changes resulting from the BEPS-project. This included for example substantial revisions on the alignment of transfer pricing outcomes with value creation and the introduction of enhanced transfer pricing documentation requirements. BEPS also resulted in increased scrutiny from tax authorities due to the increased availability of information on taxpayer’s transfer pricing system.

    The work on BEPS is still continuing, for example on measures to address the tax challenges arising from the digitalisation of the economy. It also recently published guidance on the transfer pricing aspects of financial transactions.

    Compliance (incl. Transfer Pricing documentation)

    Below we have listed the most frequently asked transfer pricing questions related to compliance.

    1. What is transfer pricing documentation?

    Transfer pricing documentation is documentation in which the business and intercompany transactions of a multinational enterprise are described. This documentation is the substantiation of the company’s compliance with the arm’s length principle and transfer pricing regulations. Transfer pricing documentation provides tax authorities insight in the intercompany transactions and makes it possible for the tax authorities to verify whether at arm’s length intercompany prices are charged.

    2. Why is transfer pricing documentation important?

    Transfer pricing documentation is the basis for companies to show their compliance with the relevant transfer pricing rules. Transfer pricing documentation is required by law in almost every country. Irrespective of whether preparation of documentation is mandatory or highly recommended, it is the best evidence of a company’s compliance with the arm’s length principle. Meeting documentation requirements minimises (the risk of) compliance penalties.

    3. When is transfer pricing documentation required?

    Transfer Pricing documentation has to be prepared on a continuous basis (in practice: every fiscal year). The way transfer pricing documentation must be prepared depends in most countries on the consolidated group revenue or the volume of the intercompany transactions.

    4. Does transfer pricing documentation requirements differ per country?

    Yes, transfer pricing documentation requirements differ per country. However, these differences are often limited as most countries based their transfer pricing documentation requirements on the OECD Transfer Pricing Guidelines.

    5. What are the transfer pricing documentation requirements in the Netherlands?

    In the Netherlands, below a consolidated group revenue of 50 million euro, the documentation requirement is form-free as long as it can be illustrated that the remunerations for intercompany transactions are at arm’s length. When the consolidated group revenue exceeds the threshold of 50 million euro, the group has to prepare a master file and local files. If the consolidated group revenue exceeds 750 million euro, the group has to prepare a Country-by-Country report as well.

    6. What is a local file?

    A local file is a local entity documentation report which consists of a detailed description and analysis of the local company and its intercompany transactions with associated enterprises in different countries. A local file has to be prepared annually. The filing of a local file is mandatory in some countries. In other countries it is mandatory to maintain a local file in the company’s administration but is filing not required. Besides these countries there are also countries where local file documentation is only highly recommended to effectively shift the burden of proof. In case of an audit, it may provide penalty protection in some countries.

    7. What is a master file?

    A master file is a MNE group’s transfer pricing report that high-level describes the business of the MNE group, its supply chain, its intangible assets and its financial policy and addresses the intercompany transactions conducted within the group. The master file is prepared centrally for the group as a whole, but is part of the local documentation requirements. It often serves as a basis for the local files.

    8. What is Country-by-Country Reporting (CbCR)?

    CbCR is a term used for disclosure by a single MNE group of information relating to each country in which it operates. The CbC-report includes amongst other the names of all its subsidiaries and affiliates in these countries and information for each of these relating to their performance, tax charges, fixed assets and details of gross and net assets, as well as payments to and/or subsidies received from individual governments in each country.

    9. What is a CbCR notification?

    Local companies of the MNE group must notify the local tax authorities which company within the MNE group will submit the Country-by-Country report and in which country. This notification must, in most countries, be received by the tax authorities no later than the last day of each reporting year.

    10. What is a CbCR filing?

    CbCR filing is the submission of the CbC-report by the responsible group entity in the country where the responsible group entity has its residence.

    11. What is a benchmark study?

    A benchmark study is an economic study and is an integral part of any transfer pricing design (or documentation process). It is an quantitative analysis for testing or setting the arm’s length pricing of intercompany transactions. The aim of a benchmark study is to determine the general conditions in relation to the transactions between related parties executed by third parties on a specific market. A benchmark study is for example applied to determine the arm’s length range for intercompany services or royalty payments.

    12. How long is a benchmark study valid?

    A benchmark study is valid for 3 years if the operating conditions remain the same. However, the financial information used in the benchmark study should be updated annually until, after two updates, a new benchmark study has to be performed.


    Below we have listed the most frequently asked transfer pricing questions related to controversy.

    1. What is TP controversy?

    TP controversy is managing current and/or possible future transfer pricing disputes between a taxpayer and one or more tax authorities.

    2. Which parties are involved in a TP dispute?

    A cross border TP dispute always consists of at least two tax authorities and at least one taxpayer. Dependent on the facts and circumstances multiple departments within tax authorities may be involved in the dispute.

    3. What issues may be the subject of TP controversy/disputes

    TP disputes are about the facts and circumstances of certain intercompany transactions and the way they are interpreted. In practice the following topics may be considered usual suspects:

    1. Intangible related transactions
    2. Restructurings
    3. Inconsistencies by taxpayer
    4. Different interpretations by countries
    5. Permanent establishment issues
    6. Financial transactions
    7. Management fees
    8. Consistent losses
    9. Substance issues

    4. When will you face TP controversy?

    TP controversy will be faced when the tax authorities disagree with the way you deal with TP.

    5. Can you prepare for TP controversy?

    Yes, it is possible to prepare for TP controversy. The preparation for controversy could exist of a good evaluation and analysis of your TP policy combined with proper TP documentation. It is key to have solid and consistent substantiation of how intercompany transactions are structured and remunerated.

    6. Can you avoid TP controversy?

    No, it is not possible to avoid TP controversy. Tax authorities will form their own opinion about the facts and circumstances. However, as a company you can minimize the chance of misunderstandings about facts and circumstances with proper TP documentation. Also, you may seek to discuss issues upfront with tax authorities.

    7. How can you deal with TP controversy?

    There are multiple instruments that you can apply to avoid or solve TP disputes. Which instrument is most effective should be decided on a case by case basis and evaluated regularly. Depending on facts and circumstance of a specific case certain instruments may be more or less appropriate.

    8. Can TP disputes lead to penalties?

    TP disputes may result in penalties if adjustments are made by tax authorities. An increasingly number of countries have introduced penalties related to TP adjustments. Penalties may also apply when there is no proper TP documentation available.

    9. How can you manage your controversy?

    Managing your controversy starts with thinking of and determining your risk appetite. Next you must choose which instrument(s) to use. Also, you should establish clear internal procedures on how to handle disputes or expected disputes.

    10. What potential risks can be triggered by TP disputes?

    TP adjustments may result in double taxation of profits in multiple countries. This may often involve large financial interest. This could also require you to include a tax provision in the financial accounts. Handling a TP dispute may also require substantial internal resources and external advisory costs. Sometimes TP disputes could also result in reputational damage.

    11. Can you manage the costs involved in TP controversy?

    TP controversy depends on the facts and circumstance in each individual case. There will always be costs involved in TP controversy, however preventing TP disputes is usually less expensive than solving TP disputes. A well-considered controversy strategy will help to establish a balanced approach.

    12. What period does a TP dispute cover?

    The dispute could cover a period of one year as well as multiple years. This all depends on the facts and circumstances of the individual case. The resolution of a dispute for a certain period could also have impact on later years.

    13. Should TP controversy be part of your tax risk management?

    Yes, TP controversy should be part of your tax risk management. Because of the potentially substantial consequences companies cannot afford not managing the risks involved. Well-considered choices should be made upfront regarding the TP controversy strategy. The TP documentation should be aligned with the chosen strategy. Part of the TP controversy strategy should be the use of the different instruments to prevent or resolve disputes.

    14. What is a TP control framework?

    A TP control framework should be a mandatory part of the overall tax control framework. A TP control framework should provide insight in all measures taken by a company to obtain, maintain and improve its knowledge about TP risk exposures and how these risks are mitigated.

    Contact us

    After reading our transfer pricing questions, you may be interested in exploring the transfer pricing opportunities and risks for your company. Fortunately, our advisors are available to help you. If you would like to discuss how we can be of service to you, please make an appointment for a free consultation by phone or fill in our contact form. We are looking forward to meeting you and discuss all your transfer pricing questions in person.

    On this page you will find an overview of the most frequently asked transfer pricing questions.This overview will be updated over time and new topics will be added. Please contact if you miss a particular question.

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