As we are moving to the end of the calendar year, many companies have to deal again with typical topics at year end closing. A classic and recurring theme relates to year-end transfer pricing adjustments. This is specifically the case when within the transfer pricing system so-called routine entities such as limited risk distributors or contract manufacturers are entitled to a defined target margin but there is a gap between the target margin and the actual YTD margin. As there is typically a time-lag between transfer pricing adjustments and the intended P&L impact, one-off year-end adjustments are often the only possibility to still get to the desired margins for group legal entities.
What appears at first glance reasonable from a transfer pricing perspective, may induce other follow-up actions such as changes to VAT or customs declarations. Even though such adjustments should lead to arm’s length results, it could be challenged if third parties would agree to such retrospective price adjustments. Further, a mismatch between transfer pricing policies and actual outcomes may indicate weaknesses in processes and internal control. Therefore, it is highly recommended to take care of operational transfer pricing process and stay out of trouble – not just at year end.