Home Articles SPECIAL REPORT: Transfer pricing in today’s times Operational transfer pricing

SPECIAL REPORT: Transfer pricing in today’s times Operational transfer pricing

Christian Wiesener discusses the traditional approach to transfer pricing, which is still relevant and applied, and highlights the need for multinationals to “operationalise” – in other words to continuously implement their transfer pricing – and the benefits thereof

The increased complexity of and focus on transfer pricing by governments and tax authorities globally have necessitated the review of traditional transfer pricing approaches to give specific attention to transfer pricing implementation and compliance.


Globally and in Africa relevant initiatives have had an impact on transfer pricing.

For example, the base erosion and profit shifting (BEPS)1 initiative undertaken by the Organisation for Economic Co-operation and Development (OECD) at the request of the G20 countries has become one of the most important tax-related – and particularly transfer pricing-related – matters.

In 2013 the OECD also published a Draft handbook on transfer pricing risk assessment for tax authorities.2 The South African Revenue Service (SARS) was one of the main contributors to this publication.

From a specifically African perspective, the OECD supports the Africa Tax Administration Forum, which has created a dedicated transfer pricing team. Accordingly, the topic of cross-border transfer pricing reviews (especially joint reviews) and information-sharing by revenue authorities in Africa has been on the cards.

While transfer pricing was historically a neglected area of tax in most countries in Africa, it has become a focus in more recent times. African countries such as Nigeria, Kenya, Uganda, and Angola have already – or are in the process of – introducing and enforcing transfer pricing rules.

Furthermore, recent developments in South Africa include the introduction of overhauled and modernised transfer pricing legislation, the publication of a Draft Interpretation Note regarding financial assistance by SARS, and a new corporate tax return with specific detailed transfer pricing-related questions and information requirements.

Thus, given this overall focus on transfer pricing, it is critical for a multinational entity to have sound transfer pricing policies and documentation in place, but also to ensure implementation and efficient compliance management.


BEPS and the fast-moving changes to transfer pricing requirements under global (OECD) and local rules created the need for multinational companies to adapt quickly to this new tax environment. While it was initially seen as a phenomenon more common in the US and Europe, and perhaps in the Asia Pacific region, transfer pricing is today a tax reality in many countries in the world. In Africa, most countries have either introduced transfer pricing legislation, or they apply transfer pricing principles in terms of local general anti-avoidance rules. In addition, tax authorities supported by the Africa Tax Administration Forum and the OECD are skilling themselves up to increase their transfer pricing audit capabilities. As mentioned above, in a number of African countries tax authorities have commenced transfer pricing audit activity or queries and cross-border transfer pricing reviews of multinationals by tax authorities working together within Africa have been reported.

Traditional transfer pricing approaches have commonly been used by taxpayers to address transfer pricing requirements. These approaches generally involve two phases, namely transfer pricing planning and transfer pricing compliance.

Transfer pricing planning and transfer pricing compliance

Transfer pricing planning and transfer pricing compliance normally include, and are based on, the preparation of transfer pricing documentation for the purposes of documenting relevant information in respect of cross-border-connected party transactions entered into. This would normally include a functional analysis, addressing the functions performed, the risks borne and the assets employed by the parties to the cross-border-connected party transactions, a group analysis (background to the operations of the multinational group), an analysis of the industry in which the multinational entity operates, an analysis of the transfer pricing methods considered for benchmarking the relevant transactions, and an economic analysis including the required benchmarking exercise. Transfer pricing documentation can be prepared either prospectively or retrospectively.

Transfer pricing planning

Transfer pricing (planning) documentation is generally prepared prospectively with a view to determine an arm’s length price in respect of a specific cross-border-connected party transaction during the planning phase (that is, prior to the proposed transaction is entered into), or before the relevant accounts are closed for the financial year, to allow for the taxpayer to make an actual transfer pricing adjustment in the accounts to achieve the determined arm’s length price, if required.

In addition, transfer pricing planning is relevant where for example a multinational group intends to move functions and/or risks to another country and the group needs to determine the arm’s length price in respect of the relevant transaction following the move of the functions and risks, as well as the arm’s length price for the actual moving of the functions/risks.

Transfer pricing compliance

Transfer pricing documentation is also often prepared retrospectively, that is, after the accounts were closed for the relevant financial year. Retrospective (compliance) documentation is prepared to support the tax filing positions in a given jurisdiction. Taxpayers may need to make transfer pricing adjustments in the income tax returns in order to achieve the required transfer prices, for tax purposes. These adjustments may result in penalties (including a so-called secondary adjustment).


Often, upon completion of the transfer pricing study (that is, the preparation of the transfer pricing document) the exercise is considered finalised and the transfer pricing documentation filed. Only in the case of a tax authority query or a transfer pricing audit would the documentation be looked at again and the matter be reviewed. This poses the risk that any deviation from the transfer pricing approach determined may not be picked up by the taxpayer and it may therefore result in transfer pricing adjustments by the tax authority, with consequent penalties.

Discrepancies observed arise between what is set out in legal agreements relating to cross-border-connected party transactions and what is reflected in the relevant transfer pricing documentation, and what actually happens.

Particularly where a more sophisticated system of transfer pricing documentation exists, or where global documentation is maintained, multinational enterprises often perform annual retrospective transfer pricing adjustments across the group. Thus, annual cross-payments are charged to the relevant group entities abroad to ensure that each group entity achieves a certain profitability at year end, as determined in the transfer pricing study. However, this may create a transfer pricing risk for the entity in which taxable income is reduced as a result of the transfer pricing adjustment, especially if that entity does not have transfer pricing documentation in place that supports the transfer price (after the adjustment) to be arm’s length. A similar transfer pricing risk may also exist where two entities in a multinational group enter into a cross-border-connected party transaction and both entities have transfer pricing documentation in place, but where these documents are not aligned, thereby supporting conflicting transfer prices.

In addition, employees churn, which often leaves gaps in corporate knowledge regarding cross-border arrangements, agreements, processes, etc. Factors such as poor communication, lack of training and decentralisation also create risks. Regarding processes, shortcomings may be experienced because of outdated or missing transfer pricing policies, poor internal controls, inconsistent processes or the lack of automation, etc. While companies are continuously improving enterprise resource planning (ERP) systems, issues may result from, for example, the use of multiple ERP systems, the use of complex Excel spreadsheets, manual data gathering and manipulation, and inconsistent sources of data. Particularly the question whether an accounting system is able to deal with transfer pricing policies and the implementation of transfer pricing-related information is not confirmed.

Traditional transfer pricing approaches need to be reconsidered against this background to ensure that a taxpayer complies with legislation and transfer pricing rules to identify weaknesses and to institute appropriate remedies. Moreover, the key question should be asked: How do we ensure appropriate implementation of our transfer pricing policy on a day-to-day basis? This question is addressed below.

Operational transfer pricing

In brief, operational transfer pricing (OTP) focuses on day-to-day transfer pricing implementation. An arm’s length transfer pricing policy without accurate implementation of this policy is not good enough to avoid/mitigate regulatory risk, tax risk or financial statement risk. OTP therefore complements the preparation of transfer pricing planning and transfer pricing compliance documentation by focusing on transfer pricing implementation and monitoring and it significantly refines and improves a multinational entity’s transfer pricing approach.

The issue

Many multinational companies struggle with the resource-intensive requirements to manage intercompany arrangements, which can involve complex collaboration among staff members in tax, finance and accounting, operations and information technology. Challenges are often, and primarily, observed relating to people, processes, technology and data. Large multinationals can create value and reduce risk by aligning the transfer pricing policy with day-to-day operations through well-defined business processes and technology solutions. This requires a holistic view and cross-functional execution that can be challenging, even for large multinationals that are good at other aspects of global integration. Each company has a unique set of OTP challenges.

The solution

OTP methodologies address these challenges through people and process integration as well as supporting technologies, basically connecting transfer pricing planning and transfer pricing compliance.

A good OTP methodology should address three main sections, namely transfer pricing management, transfer pricing implementation, and transfer pricing compliance. Generally, these three areas should include the steps discussed below according to which the needs of the relevant member of the multinational should be considered individually.

Transfer pricing policy management

A first step to address operational transfer pricing is to ensure transfer pricing policy management within a multinational group. Transfer pricing policy management should focus on the identification of all relevant intercompany arrangements, to ensure that all cross-border-connected party transactions are recognised. Transfer pricing policies in respect of these transactions, focusing on the transactions based on their relevance, should then be defined and documented. Based on the information gathered so far – that is, the relevant arrangements and the policy determined – the relevant intercompany agreements should be executed.

Transfer pricing policy implementation

In a second step, the transfer pricing policy implementation should be addressed.

Transfer pricing calculation mechanics need to be created based on the existing transfer pricing policy. These provide the basis for cross-border-connected party transactions to be processed. This step requires that tax, accounting and IT functions collaborate to ensure the day-to-day transaction processing approach is consistent with the transfer pricing policy.

The results of these transactions – the pricing including cost allocation, types and levels of expenditure, etc – need to be monitored and adjustments made on an ongoing basis. It is imperative that the monitoring and adjustment capabilities are correctly set up and automated on a timely basis.

Reporting concludes the policy implementation phase. It is important that reporting capabilities be efficient and support the risk management as well as compliance requirements.

Transfer pricing compliance

The final section relates to transfer pricing compliance, which entails the preparation of retrospective transfer pricing documentation and demonstration of the pricing achieved by the relevant taxpayer versus the arm’s length pricing in respect of each relevant cross-border-connected party transaction by independent companies (comparables).

Generally, an annual transfer pricing risk assessment should drive the scope for the preparation of transfer pricing compliance documentation. Particularly with a view to the proposed new transfer pricing documentation guidelines, which are expected to be finalised later this year by the OECD, specific report elements that are common to the members of a group (such as Masterfile documentation) should be maintained centrally and simply provided to the other group members when required.


Operational transfer pricing is the link between transfer pricing planning and transfer pricing compliance and it provides various improvements to multinational groups’ transfer pricing approaches.

In summary, these include the use of technology to manage workflow, organise supporting information, and fully automate reporting. In addition, this methodology helps defining and documenting accountabilities, processes and controls.

These improvements, if properly implemented, may result in potential benefits such as increased transparency into transfer pricing results, enhanced transfer pricing monitoring and adjustment capabilities, enhanced efficiencies, as well as lower compliance costs and reduced financial statement and tax risks. ❐


1 Organisation for Economic Co-operation and Development (OECD), Addressing base erosion and profit shifting, OECD, 2013.

2 OECD, Public consultation: draft handbook on transfer pricing risk assessment, OECD, 2013.

Author: Christian Wiesener is an associate director at KPMG Global Transfer Pricing Services in Cape Town