If an intercompany agreement does not exist , or when the conduct of the related parties shows that the contractual terms are incomplete or have not been followed , the intercompany transaction will be interpreted based on a careful review of the parties ’ actual conduct . Describing the actual conduct of the related parties requires an examination of all of the facts and circumstances surrounding how they interact in a commercial context — how they generate value for themselves and the group , how that interaction contributes to the rest of the value chain , and what the interaction involves . That means identifying precisely what functions each party actually performs , the tangible and intangible assets each party actually employs , and the risks each party actually assumes and manages . This process is typically referred to and documented as a “ functional analysis .” At this stage of a transfer pricing analysis , the facts that are economically relevant are gathered during interviews with key employees . During a transfer pricing audit , revenue authorities are likely to conduct their own functional analysis interviews to develop an understanding of the business . So , if you ’ re able to perform the functional analysis interviews up front , and you ’ ve carefully documented the actual conduct of the related parties as one part of your contemporaneous transfer pricing documentation , the tax authority ’ s functional interviews become a process of validation rather than fact finding . For this reason , you should review and update your intercompany arrangements periodically to ensure that there is consistency between the legal form and managerial substance of your intercompany transactions .
What now ? While globalization has facilitated international trade , growing sovereign debt and cash-strapped governments have arguably ignited worldwide transfer pricing disputes . Political will , influenced by perceptions that multinational corporations are not paying their “ fair share ” of taxes , has created a contentious environment in which transfer pricing is considered low-hanging fruit for revenue collection by tax authorities . The many revenue authorities that adhere to the OECD ’ s transfer pricing guidelines 6 are targeting their audits at aligning transfer pricing outcomes with value-creation activities , with a focus on identifying the important people functions . Companies must review their business models to monitor , and perhaps restructure , the relative risks assumed and the requisite managerial substance requirements on an entity-by-entity level . The goal should be to establish transfer pricing policies that are practical to administer , flexible enough to comply with multijurisdictional regulations , and — most importantly — reflect the substance of the intercompany arrangements .
Congratulations !
Our congratulations to
Dr . Christopher Burnley upon his election to CPABC Fellowship .
Dr . Burnley is a Professor in the Faculty of Management at VIU .
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