Managerial Transfer Pricing is a VERY REAL THING.
What do I mean by Managerial Transfer Pricing? I'll explain though an anecdote, iterations of which I've seen at least a dozen times across industries, structures, and enterprise sizes.
Company ABC moves from an ad hoc, transaction-by-transaction pricing model to one involving a US entity transacting with controlled-margin, low-risk resellers and service providers. At first glance, it's as close as it gets to a "slam dunk" TP planning project: the key personnel, IP development activities, and business risks all clearly reside with the US HQ, and the reporting systems and other infrastructure are all in place.
HOWEVER, one thing that's not in place is buy-in from local-country stakeholders. When they are informed of the new policy which fixes or caps their margins, they push back forcefully, and even undermine the policy through uncooperative business and accounting decisions.
The lesson for tax and transfer pricing practitioners here is to consider the "soft skills" side of tax planning. Identify and consult your global stakeholders beyond the tax and finance functions. Include them in the project design and development. Examine the impact of TP policies on performance metrics, and consider modifying the metrics in light of the pricing policy changes.
The irony is that there may be no better example of arm's length behavior within a multinational entity than that of cross-jurisdictional stakeholders protecting their own interests and profits, but it would take a much savvier TP professional than myself to craft this into a successful audit defense!
Chad Martin directs Eide Bailly's Transfer Pricing Services practice.
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