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Transfer Pricing

Merging Transfer Pricing Policies


I was recently speaking with a customer whose company had completed a large merger during 2022. Now she was tasked with harmonizing two very different sets of transfer pricing policies, since the two companies that merged used a cost-plus model and a licensing model, respectively. 

Arguably the first challenge is logistical in nature—harmonizing the ERP systems. Even if the two companies use the same system, the configurations are bound to have significant differences. Alongside this effort, harmonized policies can be implemented within the ERP. Aside from logistical challenges, which are often in the spotlight, a taxpayer must consider the strategic implications of the harmonized set of transfer pricing policies. Traditionally, transfer pricing planning was focused on tax efficiency, a diplomatic way of saying, “minimization of tax burden.” IP migration to low-tax jurisdictions was the ultimate way to do this, and many MNEs would park their IP thusly and license it out to their affiliates worldwide. But moving any IP to the lower of the two tax jurisdictions post-merger, or even a third location that was not part of the fact pattern of either company, invites additional scrutiny. I would argue that minimizing scrutiny—or at least not inviting additional scrutiny—from tax authorities in the jurisdictions in which the MNE operates is just as important as minimizing the tax burden, if not more.  

The bottom line is that all savings and costs must be considered—tax savings from tax-efficient planning must be weighed against potential costs arising from examination and litigation (perhaps using a probability percentage to take the uncertainty into account). Perhaps something like a cost-plus model that provides a routine return to various tax jurisdictions winds up being less expensive in the long run. 

Another factor—and arguably the one that anyone outside of the tax department focuses on the most—is which set of transfer pricing policies provide the most operational efficiency. I’m not speaking merely in terms of the accounting/tax side of things, either. You need to dive into true operations such as logistics, human capital, and physical assets. To optimize transfer pricing policy harmonization, I would look for a transfer pricing policy set that intersects tax burden minimization, risk mitigation, and operational efficiencies. And it behooves a taxpayer to potentially rank the factors. You may notice that I’ve started with tax efficiency, which arguably is the least important, and ended with operational efficiency, which may very well be the most important—if a tough pill for us tax professionals to swallow.