COVID‐19: Adjusting Low-Risk Based Transfer Pricing Models To Increase Cash Liquidity

Background

Many multinational companies, large and small, use the common low-risk based transfer pricing models, which typically include low-risk distributors, service providers, contract manufacturers, R&D centers, and other cost business units, in their supply chain model.

The low-risk models work in a manner that the low-risk entity bears limited risks, and as such, it usually earns a constant targeted, limited profit. Consequently, the remainder is allocated to the principal company. Typically, the principal company owns the significant IP of the group, responsible for most of the functions associated with the value drivers of the group and bears most of the group's risks. Accordingly, when the group as a whole incurs a loss, the low-risk entity will record a limited profit margin. On the flip side, when the group earns significant profits, the low-risk entity will continue to record the same limited profit margin.