Stage two, the execution
Operational transfer pricing (OTP)
Operational transfer pricing. Where the decision becomes live operating models, agreements, benchmarks and accounting data. This is the stage that runs during the year rather than after it, and it is where most of the manual work in transfer pricing currently sits.
Operational, meaning it runs on a schedule
The gap between a transfer pricing policy and a set of accounts is operational transfer pricing. Somebody has to take the policy, apply it to this period's cost base, produce a number, post it, and be able to show where it came from.
In most groups that is a spreadsheet rebuilt every quarter by the person who happens to understand it. Here it is a calculation defined once, run on schedule, and logged.
What a period run involves
- Cost base assembled from the accounting data.
- Allocation key applied, per the policy set at design stage.
- Mark-up taken from the design record, not retyped.
- Charge produced per entity pair and per transaction type.
- A trace retained from ledger line to invoice value.
Item by item
What sits in Implementation.
Intercompany agreements
The legal form of the policy. Drafted against the terms recorded at the design stage, so the agreement says what the calculation does, which is the first thing an auditor checks and the thing that most often does not hold.
Held with version history, so the agreement in force for a given period is the one the file cites.
Intercompany calculations
The periodic pricing run, and the part of transfer pricing that most resembles a monthly close. Data imported and adjusted from the accounting system, the policy applied to produce the invoice values, and a full trace kept from ledger line to charge.
Policy changes take effect in the calculation rather than in a document describing the calculation. Import files come out in the format the accounting software expects, cost breakdowns in the format management and compliance ask for, and the periodic reconciliation is part of the run rather than a separate exercise afterwards.
Includes the year-end true-up, the adjustment that brings a tested party back inside the arm's length range before the accounts close.
Filing of intercompany schedules
The output that goes to the tax return rather than to the file. Intercompany balances and flows in the format the local filing requires, produced from the same data as the calculation rather than rekeyed from it.
Thin capitalisation analysis
Whether intra-group debt is debt. Gearing tested against the group's own position and against local limits, interest capacity measured under the applicable deduction limitation rules, and the arm's length interest rate tested separately.
It sits here rather than in benchmarking because it is a live constraint on what may be charged, not a one-off study.
Interest rate setting
Arm's length rates for intra-group financing, set rather than argued about. Creditworthiness assessed by financing type and borrower characteristics rather than inherited from the group, market rate data brought in and standardised, and arm's length adjustments applied on top.
Benchmarking studies, CUP (royalties)
Comparable uncontrolled price applied to licensing. Royalty rates from third party licence agreements, screened for the same type of intangible, the same territory scope and a comparable exclusivity position, then reduced to a defensible range.
Benchmarking studies, CUP (services)
Where a genuinely comparable third party service price exists, a CUP is stronger than a margin-based method. Used for services that are bought externally as well as internally, which is more often than groups assume.
Benchmarking studies, CUP (financing)
Arm's length interest on intra-group loans, cash pooling and guarantees. Screened on currency, tenor, seniority and the borrower's standalone credit position rather than the group's.
Benchmarking studies, TNMM
The transactional net margin method, the workhorse for routine distributors, service providers and contract manufacturers. Independent companies screened on activity, independence, geography and financial data, tested on the profit level indicator chosen at design stage, and reduced to an interquartile range.
The range then becomes a live constraint in the calculation, not a number in a report.
Process, data and controls
Writing down who does what, when, and what happens if they do not. Unglamorous, and the difference between a policy that survives a personnel change and one that leaves with the person who understood the workbook.
One chart of accounts mapping, one set of definitions, one reporting format across jurisdictions. Standardising this is the precondition for everything else being automatable.
