Understanding Transfer Pricing Implications Of Intra-Group Business Structures

One of the highly contentious areas during a Transfer Pricing (TP) audit is the characterisation of related entities based on the functions performed, assets utilised and risks assumed (commonly referred to as an FAR analysis) relating to a controlled transaction. The functional characterisation of the entity informs the expected returns that should be earned and the expected taxes to be paid.

Functional characterisation can be contentious because in practice, businesses in the same industry may have different functional profiles, or the same business may restructure, resulting in a change in functional characterisation. Further, sometimes, the tax authorities may disagree with the taxpayer's functional characterisation of its business. Since functional characterisation impacts the treatment and expected returns of an entity, changes or disagreements on this could potentially pose a significant TP risk exposure to a taxpayer. As such, this article sheds light on