Improving efficiency in transfer pricing: The role of regulation and documentation


The concept of transfer pricing has been with us for decades and attracted keen attention when multinational corporations began to manipulate prices to minimize taxes through intercompany transactions. Intercompany transaction involves a business dealing between different entities within the same parent company or corporate group.

These transactions can involve the transfer of goods, services or financial assets between subsidiaries, divisions or other affiliated entities within the same organization. A pricing arrangement for a transaction between related entities within the multinational corporate group is what transfer pricing is all about.

Transfer pricing is characterized by the allocation of profits and costs among subsidiaries of multinational enterprises (MNEs) involved in cross-border transactions. In considering cost allocation, several key factors and variables influence a decision. Those factors include the enterprise’s cost objectives and cost drivers.

Its financial reporting or performance evaluation may determine a multinational enterprise’s cost objective likewise its cost drivers such as direct labour hours, machine usage or sales volume. That said, the specific approach varies depending on the industry, organization and context.

Efficiency of Intercompany Transactions

To achieve the goals of transfer pricing, international transactions need to streamline their operations to ensure efficiency. Operational efficiency can be transformed through relevant legislation and improving documentation with modern systems. Indeed, efforts aimed at building efficient systems help to determine tax liabilities, taxable profits and ensure fairness in cross-border transactions.

  1. Regulatory Framework

Indeed, transfer-pricing regulations have evolved over the years to incorporate principles of fairness and economic substance in the face of increasing complexities of intercompany transactions. To serve as a global reference, the Organization for Economic Cooperation and Development (OECD), for instance, developed a comprehensive guideline for transfer pricing. The rationale behind the guideline is to promote fair and transparent transfer pricing practices, ensure the equitable distribution of taxable profits in cross-border transactions.

One of the technical issues embedded in the guideline is the arm’s length principle. The arm’s length principle requires that transfer prices between related entities should be set as if they are unrelated entities engaging in similar transactions.

This principle is anchored on the fact that unrelated parties engage in transactions with the principal goal of maximizing their own profits. It is to ensure that profits are allocated fairly and in line with the economic reality of the business operations. Nevertheless, to arrive at the arm’s length price can be challenging especially for transactions involving unique intangible assets or complex services. This challenge brings to the fore the need to choose the most suitable transfer pricing method.

A decision of that sort requires a careful evaluation of the nature of the transaction, availability of comparable data and the level of reliability desired. In the same vein, a multinational company must consider the method that best aligns with the facts and circumstances of their intercompany transactions.

Moreover, they (OECD) guideline emphasizes the importance of accurate documentation, including country-by-country reporting (CbCR) to enhance transparency, compliance and minimize risks a multinational corporate group is exposed to.

  1. Documentation

Documentation plays a critical role in managing intercompany transactions with the rapid growth of global trade. Indeed, tax authorities are also very keen on detailed documentation to support a transfer pricing policy of a multinational enterprise.

Documentation is required to show that pricing is consistent with the arm’s length principle and based on reliable data and methodologies. Documentation also takes cognizance of transfer pricing study, analysis of comparable transactions and a record of the pricing methodology used.

Traditionally, documentation methods take the form of intercompany agreements, invoices and billing statements, accounting records as well as intercompany reconciliation. Advancement in technology necessitates the need to establish and maintain a centralized repository or digital database to store all intercompany agreements and records of transactions. This is to ensure easy access to relevant information and facilitate better compliance monitoring and auditing.

Based on its relevance in transfer pricing, documentation necessitated a call for the implementation of efficient processes by leveraging on cutting-edge technologies.

Some of the modern technological tools to optimize and streamline documentation include automation (robotic process automation (RPA), electronic signature, Electronic Data Interchange (EDI), cloud-based technology, data analytics and Business Intelligence (BI) tools, Artificial Intelligence (AI) and Machine Learning (ML).

Electronic signature application, for instance, enables a digitalized signing of intercompany agreements, contracts and other documents and thereby eliminate the need for physical signatures and paper-based processes. An electronic signature can be fully integrated with different processes and tools already in use to expedite the approval and execution of intercompany transactions.

In the case of Electronic Data Interchange (EDI), it enables the electronic exchange of business documents such as purchase orders, invoices and shipping notices between different computer systems. The technology focuses on faster and more accurate data transmission needed for intercompany transactions.

Multinational enterprises can also leverage on Enterprise Resource Planning (ERP) systems to integrate key business processes ranging from accounting, finance, procurement or inventory management.

They can automate transaction recording, streamline workflows and provide real-time visibility into intercompany activities. Real-time reporting provides stakeholders with data-driven insights into intercompany transactions and financial performance for proactive decision-making.

Aside from that, with the advent of cloud-based technology, multinational enterprises (MNEs) can use this platform for a secure storage, access data and collaboration on intercompany transactions. A robust cloud-based technology offers scalability, flexibility and allows companies to efficiently centralize and manage their intercompany transactions.

Key Takeaways

It is worth noting that challenges in transfer pricing arise due to underpinning factors which influence appropriate pricing in intercompany transaction. These issues are worth considering to ensure transparency.

  • Regulatory Compliance: Multinational enterprises need to adapt and harmonise their operations with systems to make compliance with transfer pricing regulations more effective. Timely compliance helps to minize incidents of fines, penalties or disputes with attendant delays in resolutions.
  • Choosing a Transfer Pricing Method: A decision regarding the choice of an appropriate transfer pricing method requires an exploration and careful analysis of many factors. That said, some of the transfer pricing methods available for consideration are transactional net margin method, comparable uncontrolled price, resale price, cost plus, and profit split methods.
  • Transfer Pricing Reforms: Tax authorities have the power to amend or reform transfer pricing regulations and adjust rates if they believe that a prevailing pricing is not align with the arm’s length principle. In doing those amendments or adjustments, it is important to harmonise processes to avoid incidents of double taxation or disputes between key players involved in international transactions.
  • Transfer Pricing Audits: Tax authorities need to conduct transfer pricing inspections to ensure compliance and assess the accuracy of transfer pricing policies. Those inspections or audits can be time-consuming, resource-intensive and may require extensive documentation. Modern software applications can be used to improve audit processes and save time.


In the closing, it is important for multinational enterprises to carefully manage transfer pricing risks by adopting robust transfer pricing policies, establish and maintain seamless documentation systems. They need to undertake regular reviews and updates of intercompany agreements and pricing methodologies to ensure compliance and reduce the risk of audits or disputes. A transaction may have its unique challenges and risks and it is crucial to consider the specific circumstances and applicable regulations. It is indeed important to seek a professional advice to manage the emerging risks associated with transfer pricing with regard to international transactions of multinational enterprises (MNEs).


Bernard is a Chartered Accountant with over 14 years of professional and industry experience in Financial Services Sector and Management Consultancy. He is the Managing Partner of J.S Morlu (Ghana) an international consulting firm providing Accounting, Tax, Auditing, IT Solutions and Business Advisory Services to both private businesses and government.

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