Functional analysis of transfer pricing
An essential step in the transfer pricing policy of international groups
Transfer pricing is now a major issue for multinational groups. Tax administrations pay increasing attention to transactions between related companies to ensure that taxable profits are properly distributed among the different States in which the group operates.
In this context, functional analysis is central. It identifies the real economic role of each company in the group and determines whether its remuneration complies with the arm's length principle enshrined in OECD international standards.
What is a functional analysis of transfer pricing?
Identification of functions, assets and risks
The functional analysis consists of examining the functions performed, the assets used and the risks assumed by each of the entities involved in intra-group transactions.
The purpose of the study is to determine:
- which companies perform strategic or operational functions;
- which entities develop or exploit intangible assets;
- which companies actually bear the economic risks associated with the activity;
- how value creation is distributed within the group.
This analysis is fundamental because not all entities of a multinational group have the same economic role. A company with limited functions and little risk will not be entitled to receive the same remuneration as a company with strategic functions or significant intangible assets.
An indispensable basis for determining transfer prices
Functional analysis is the starting point for any transfer pricing policy. In particular, it allows the selection of the most appropriate pricing method and justifies the level of remuneration awarded to each entity in the group.
It also plays a key role in the transfer pricing documentation required by many tax administrations.
Why is functional analysis strategic for multinationals?
Secure transfer pricing policy
Inadequate or disconnected functional analysis of operational reality may weaken a group's overall transfer pricing policy.
Tax administrations are now examining in particular depth:
- the reality of the functions performed;
- effective risk control;
- consistency between intra-group contracts and actual transactions;
- the location of intangible assets that create value.
Imprecise documentation can lead to significant tax adjustments as well as risks of international double taxation.
Supporting international restructuring
Functional analysis is also essential in the reorganization of international groups: centralization of functions, transfer of activities, restructuring of distribution chains or reallocation of intangible assets.
In these situations, tax administrations carefully verify the economic reality of the functions and risks transferred and the consistency of the remuneration set up after restructuring.
Accompaniment to our Cabinet on Transfer Pricing
Expertise in international taxation and transfer pricing
Our Cabinet supports multinational groups in all their international tax and transfer pricing issues.
We intervene in particular to:
- perform or review functional analyses;
- map intragroup flows;
- analyse the functions, assets and risks of different entities;
- secure transfer pricing policies;
- prepare transfer pricing documentation;
- assist companies in international tax controls and litigation.
An approach adapted to the operational issues of the groups
Our approach is based on a legal, fiscal and economic understanding of international business models.
We support our customers in securing their intra-group transactions in order to limit tax risks and ensure that their transfer pricing policy is consistent with the economic reality of their business.
In an environment marked by enhanced international tax controls and transparency obligations, functional analysis is now an indispensable tool for securing multinational groups.
