When companies think of the due diligence process, the concerns typically rest with the usual suspects: Are the sales numbers really what they brag about? Are they current on their compliance filings? Are there any product liability issues that can come back to bite us? Are there environmental issues that need to be addressed or could possibly sink the deal? Transfer pricing is often overlooked, but due diligence efforts should encompass transfer pricing as well. Are there pricing issues? Can they hurt the deal?
How can you incorporate transfer pricing into the due diligence process? To start, think in terms of what the current changing environment is requiring of multinationals in the jurisdiction, and then make like an auditor and perform your due diligence effort. As a starting point, you should ask about what policies and procedures are in place and what agreements support them. This is also a great opportunity to compare the agreements with the policies and procedures to see if they align.
The next step is to ask about the master file and local files. Have they been prepared? Are they current? Are all transactions documented or are there “exceptions” you should be aware of? Is there reliance on any internal materials for a CUP/CUT analysis, and is this underlying information available for examination?
Equally important is asking about any audits either completed or in process that may give rise to substantial liability. Think in terms of some of the larger transfer pricing issues that have come to light in the last few years, with companies like Medtronic, Coca Cola, and Eaton. While most acquisitions will not be with companies the likes of these, the potential issues that may be similar (albeit not in the range of a 10 significant digit check request, but even a large 6-digit check request is sufficient to kill the viability of a deal).
As an incidental benefit, examining the master file can confirm what is generally understood to be happening and what is actually occurring within the company and where. This also gives insight into how well the new addition will fit in with your existing structure. The responsibilities and assigned roles of the target company subsidiaries may be at odds with the acquiring companies’ subsidiaries assigned roles.
Lastly, look at insights gained from the country-by-country reporting for further support of the target company efficiency and capability. Keep in mind that all of the above discuss the most obvious areas. Additional items of interest would be the IP of the target, any financing issues or prohibitions within credit agreements, exit charges if relocation of functions, assets or risks were to occur, to name a few. In all, the process becomes more interesting as it evolves.
