Transfer pricing is understood as a subject for multinational corporations, and private groups have historically treated it as someone else’s problem. The assumption was reasonable while the jurisdictions such groups used did not enforce the rules or, in several cases, did not have them. That is no longer the position, and the change has caught a large number of family groups holding arrangements that were never documented because nobody expected them to be examined.
The principle is straightforward: transactions between related parties should be priced as they would have been between independent parties dealing at arm’s length. The difficulty for a private group is not the principle but the evidence. A charge that is commercially sensible and undocumented is, from an examiner’s point of view, indistinguishable from one that is arbitrary.
The three flows that attract attention
Management and service charges are the most common. A holding company or a family office provides services to operating entities and charges for them, frequently as a round figure settled years earlier and never revisited. The questions asked are what services were actually provided, what evidence exists that they were provided, how the charge was arrived at, and whether the recipient obtained a benefit it would have paid for from a third party.
Intercompany loans are the second. Balances between related entities are often left to accumulate without a written agreement, without a stated rate, without a repayment term and without security, and are then described as loans. An examiner may ask whether the arrangement is a loan at all, and if it is, whether an independent lender would have advanced the same amount on the same terms. Licence fees for intellectual property are the third, and are the most technically demanding, since they require a view on what the property is worth and who developed it.
A charge that cannot be explained by reference to what was actually provided is, on examination, a transfer of profit rather than a payment for services.
What documentation is expected
At a minimum, each intercompany arrangement should rest on a written agreement made at the time, setting out what is provided, on what terms and at what price, with a stated basis for the price. Behind the agreement should sit evidence that the arrangement was performed: records of the services delivered, the time or resources applied, and the payments made in accordance with the agreement rather than at irregular intervals bearing no relation to it.
Where a jurisdiction imposes formal documentation requirements, these may extend to a description of the group, its transactions and the method by which prices were set, prepared to a prescribed standard and within prescribed deadlines. Thresholds and formats vary and are properly checked in each jurisdiction where the group has entities. What does not vary is that documentation prepared contemporaneously carries weight and documentation prepared after an enquiry begins carries very little.
Where private groups are most exposed
The characteristic exposure is the historical arrangement nobody has revisited. A charge set when the group had three entities and one market, still applied unchanged across twelve entities and six markets, will not reflect what is now provided to whom. The absence of any adjustment over a long period is itself an indication that the charge was never priced by reference to the underlying activity.
The second is the informality that family ownership permits. Where the same individuals control every entity, arrangements are made in conversation, funds move between entities as convenient, and the accounting entries are created afterwards to describe what happened. This is efficient and it produces a record in which the documents follow the money rather than the money following the documents, which is the opposite of what an examination expects to find. Correcting it prospectively is straightforward; correcting it retrospectively is not.
This note is general in application and does not constitute legal, tax or regulatory advice. It describes practice observed across institutions and should not be relied upon in relation to any particular group.