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Transaction pairs: the basic unit of transfer pricing

Intercompany Agreements

26 May 2023

Before you can write ICAs, you need to know what the relevant transactions actually are.

As far as I know, we at LCN Legal are unique in the world of transfer pricing. We are lawyers who specialise in the legal implementation of TP, but we don’t advise on TP itself.

This means that every year we get to review a large number of TP policies, studies, reports, master files and local files prepared by other professionals (both in-house and in advisory firms).

Sometimes, after reading those documents (with a view to creating appropriate intercompany agreements), we are none the wiser as to what the relevant intercompany transactions actually are.

So I thought it would be worth reminding people about a concept which is at the heart of transfer pricing and the arm’s length principle: transaction pairs. As the slide above states, these are the basic 'building blocks' of transfer pricing.

A transaction pair is a pair of associated entities which enters into a transaction – in other words, agrees to exchange value of some description.

Usually, the ‘value’ provided by one party to the transaction is a payment. In which case, defining the transaction involves being clear about:

  • which counterparty will receive the payment
  • how the payment is to be calculated
  • what the payment is for (e.g. services, goods, IP)
  • how that benefits the paying party.

It feels strange to write this, since it’s so fundamental. And yet it’s not uncommon to see TP reports and similar documents which talk about functions and risks and tested parties and so on, but don’t actually specify the individual transactions involved – let alone identifying the commercial terms of the transaction.

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Article by
Paul Sutton
LCN Legal Co-Founder

Free Guide: Effective Intercompany Agreements for TP Compliance