Value chain analysis and economic theory are undoubtedly powerful tools when designing a transfer pricing policy. But sometimes these perspectives can result in a confused description of what the controlled transactions within a group actually are.
The consequences can include very strange looking titles for intercompany agreements – such as ‘entrepreneurial services’. This is not necessarily a problem – and we’ve drafted a range of agreements with this kind of title – but it’s not ideal, because it’s not immediately apparent what is being supplied to whom. Is the entrepreneur providing services to another entity? Or is it the other way round? And what is the commercial basis for the arrangement, from each party’s perspective?
An antidote to this potential confusion is to ask the question: ‘what’s the deal here?’
If you can’t express the commercial ‘deal’ between associated entities in a few short sentences, then you’re probably unclear as to what’s going on. So your chances of ending up with a clear TP policy and a clear legal implementation are pretty much zero.
For example: in the case of a limited risk distribution arrangement, what’s the deal?
Essentially, the principal is saying to the distributor something like: ‘we want you to buy our products and sell them on by following our instructions. If you can’t sell the products, we’ll buy them back. We’ll pick up any product liability issues. And we’ll make sure you make a X% return on your costs.’