Transfer Pricing for Multi-Entity Businesses: What You Need to Know Before You Get Audited
If you have entities in multiple jurisdictions billing each other, you have transfer pricing obligations. Here is what they are and why they matter.
The basic principle
When two related entities transact with each other, tax authorities want to ensure the price charged is the same as what would be charged between unrelated parties. This is the arm's length principle, and it is the foundation of transfer pricing rules worldwide.
If your US subsidiary charges your Cayman holding company $10,000 per month for management services, the IRS wants to know that $10,000 is a fair market price. If it should be $50,000, the US is losing tax revenue. If it should be $2,000, the Cayman entity is being overcharged.
Who needs to worry
You have transfer pricing obligations if:
- You have entities in two or more jurisdictions (including different US states in some cases)
- Those entities transact with each other (services, goods, licensing, financing)
- The entities are related (common ownership or control)
This covers more businesses than most people realise. A US company with a Singapore subsidiary that provides development services has transfer pricing obligations. A UK parent with a Cayman IP holding company has transfer pricing obligations. Even a Delaware parent with a California subsidiary may have state-level transfer pricing considerations.
Documentation requirements
Most jurisdictions follow the OECD's three-tiered documentation framework:
| Document | What it contains | Who prepares it |
|---|---|---|
| Master File | Group overview, global operations, transfer pricing policies | Parent company |
| Local File | Detailed analysis of local entity's related-party transactions | Each local entity |
| Country-by-Country Report (CbCR) | Revenue, profit, tax paid, employees by jurisdiction | Groups with >€750m revenue |
Even if you are below the CbCR threshold, most jurisdictions require Master File and Local File documentation if your related-party transactions exceed certain thresholds.
Common intercompany transactions
Management fees. The most common and most scrutinised. If your holding company charges management fees to subsidiaries, you need documentation supporting the fee amount.
Intercompany loans. If one entity lends to another, the interest rate must be arm's length. Charging 0% interest on an intercompany loan is a red flag.
IP licensing. If you hold intellectual property in one jurisdiction and licence it to operating entities elsewhere, the royalty rate is a transfer pricing issue.
Cost sharing arrangements. If entities share the cost of development or infrastructure, the allocation methodology must be documented and defensible.
Penalties
| Jurisdiction | Penalty for non-compliance |
|---|---|
| United States | 20-40% penalty on transfer pricing adjustment |
| United Kingdom | Tax-geared penalties, potentially 100% of underpaid tax |
| Germany | Estimated assessment + 5-10% surcharge |
| Singapore | Surcharge of 5% on transfer pricing adjustment |
| Australia | 25-50% penalty on shortfall amount |
The compliance filing
Many jurisdictions require specific transfer pricing disclosures in the corporate tax return. In the US, Form 5471 (foreign corporations), Form 5472 (foreign-owned US corporations), and Form 8865 (foreign partnerships) all require related-party transaction reporting.
Missing these forms carries penalties of $25,000 per form, per year. For a company with five foreign entities, that is $125,000 in penalties before any transfer pricing adjustment.
How CompCal helps
CompCal tracks your entity structure and flags jurisdictions with transfer pricing filing requirements. When tax return deadlines approach, the system reminds you which entities have intercompany transactions that need documentation.