We focus on the most common, repetitive transactions that fall under these transfer pricing models
Transaction types
- Administration services
- Commercial printing
- Customer support services
- Engineering services
- Home furnishing products manufacturing
- HQ services
- Laboratory services
- Logistic services
- Management services
- Manufacturing services (Electronics)
- Manufacturing services (HVAC and large kitchen appliances)
- Manufacturing services (Motor parts)
- Marketing services
- Medical devices manufacturing
- Metal smelting services
- Software R&D services
- Textile manufacturing services
When the entity in the group is contractually engaged in the provision of services, including manufacturing service (Service Provider) to another entity in the group (Service Recipient). The Service Provide:
- operates and measured as a cost center
- does not typically provide similar services to third-parties
How it’s used
Comparing the Service Provider’s markup to independent comparable companies. The markup is calculated as Operating Profit divided by (Sales – Operating Profit). Operating Profit is represented as the earnings before interest and taxes.
The accounting of the intercompany transaction amount
From an accounting perspective, the intercompany transaction amount is represented as the Service Provider’s revenues i.e., sales from providing the service to the Service Recipient. This amount is determined by adding the markup to the Service Provider’s costs (all costs above the operating profit) achieves the targeted fixed markup. The Service Recipient’s Cost of Service or Goods in such intercompany transactions matches the Service Provider’s sales derived from the intercompany transaction
Identifying the Service Provider
a. Cost-Plus services excluding management, admin and HQ services:
- The service provider is not the the HQ entity of the group.
- The service provider does not own significant intangible assets in provider the service.
- The service provider does not bear most of the risks (product risk, Forex, inventory, bad debt)
- Contractually, payment is guaranteed from the service recipient.
- Service provider follows guidance set by the service recipient
- Service provider is not involved in strategic management decisions
- Financially, the intercompany transaction is the amount paid for the service.
- From accounting perspective, the service provider’s income (sales) is equal to the service recipient’s cost of service.
DEFINITIONS
Administration Services
Administration services, such as HR, finance, accounting, tax, IT, and legal.
Commercial printing
Commercial printing services, such as paper printing, catalogs, magazines, shrink sleeve labeling, and packaging.
Customer support services
Call center services, such as post-sale, customer care, and tier-one support.
Engineering services
Product and civil engineering services, such as electronic and industrial product design, manufacturing, engineering, infrastructure.
Home furnishing products manufacturing
The manufacturing or assembly of indoor and outdoor furniture, home decor, house-kitchen and cookware, bedding, floor coverings, toiletries and cleaning products, decorations, upholstery, and home textile fabrics.
HQ Services
Combined management and administration services. Partly or complete HQ services.
Laboratory services
Laboratory services, such as medical testing, diagnostic, and clinical research.
Logistic services
Logistic services, such as shipping, warehouse, inventory management, procurement, and packaging.
Management services
Management services, such as strategic management and involvement of the board of directors and leadership.
Manufacturing services (Electronics)
Manufacturing services of electronic components, electronic circuits, OEM.
Manufacturing services (HVAC and large kitchen appliances)
HVAC contract manufacturer services, such as manufacturing of HVAC or similar products.
Manufacturing services (Motor parts)
Manufacturing services of motor parts related components, finished goods, OEM.
Marketing services
Marketing services, such as presale, advertising, PR, branding, market research, and lead generation. Sales activities are excluded.
Medical devices manufacturing
The manufacturing of medical products and devices, including components and parts of these devices.
Metal smelting services
Smelting or refining precious and ferrous/non-ferrous metals from ore/scrap, other related products, coating, coloring, and galvanizing.
Software R&D services
Software R&D services, such as software development, bug fixing, product management, QA, UX, and software architecture.
Textile manufacturing services
The manufacturing of textile products, such as apparel.
TRANSACTION TYPES
When to use:
When one of the entities in the group, other than the main group HQ company, is a sales entity that purchases products, including software products, subscriptions and solutions, from the company who owns the products (Product Owner), for resale in its local markets (Distributor). The revenues from the third-party clients are recorded in the Distributor’s books.
How it’s used
Comparing the Distributor’s Operating Profit Margin (OPM) to independent comparable companies. The OPM is calculated as Operating Profit divided by Sales. Operating Profit is represented as the earnings before interest and taxes.
The accounting of the intercompany transaction amount
From an accounting perspective, the intercompany transaction amount is represented as the Distributor’s Cost of Goods or Services, paid to the Product Owner. This amount is determined as a calculated figure that ensures the Distributor achieves the targeted fixed operating profit margin. The Product Owner’s revenues i.e., sales, in such intercompany transactions matches the Distributor’s Cost of Goods or Services.
Identifying the Distributor
- The Distributor is not the HQ entity of the group.
- The Distributor does not own significant intangible assets.
- The Distributor does not bear most of the risks, including product risk, Forex, inventory, and bad debt.
- The Distributor follow the guidance set by the principal company.
- The Distributor is not involved in strategic management decisions.
DEFINITIONS
Consumer goods
wholesale Reseller entities are engaged in the wholesale of paper products, office supply, books, toys, gifts, stationery, and kitchen appliances.
E-Commerce resale
Reseller entities are engaged in the online resale of consumer products to end clients (B2C).
Fashion and accessories wholesale
The wholesale of apparels, accessories, jewelries, and other similar consumer products.
Home furnishing wholesale
The wholesale of indoor and outdoor furniture, home decor, house-kitchen and cookware, bedding, floor coverings, toiletries and cleaning products, decorations, upholstery, and home textile fabrics.
Industrial metal products wholesale
The wholesale of metals, finished and semi-finished metal products, and other similar industrial supplies, which are typically sold to the industrial and construction markets. The wholesalers may provide added values, such as welding and coating to the product they sell.
Industrial products wholesale
Reseller entities are engaged in the wholesale of machinery, industrial equipment, power generators, electronic parts, and electrical products. These entities may provide technical support for the customers.
Medical devices distribution
The wholesale of medical and dental products, devices, supplies, and other healthcare related products.
Software resale
Reseller entities are engaged in the resale of software products, solutions, SaaS-based subscriptions, and minor hardware.
TRANSACTION TYPES
Royalties – Straight forward intercompany transaction where one entity pays royalties, calculated as a percentage of its sales to the another entity, typically for the use of the latter’s intellectual property (patent, formula, algorithm, brand name…). The licensee records sales it made to 3rd party clients.
Commission – when a selling entity derives its revenues from commission paid by the other entity. The clients pay directly to the principal company.
DEFINITIONS
Software license royalties
Royalties for the use of intellectual property including know-how, algorithms, and formulas, whether or not the technology is patented.
Sales commission
Sales commission in the tech industry
