Week 3: Transfer Pricing

Unit 1: What Is Transfer Pricing?

What is transfer pricing?
Definition

Transfer pricing is the process of establishing a price on goods or services that are provided among related
parties.

Holding
100%

Raw material
Factory Distributor Customer
provider

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What is transfer pricing?
The basics of transfer pricing

Transfer Pricing
Principles
Holding
Many transactions occur between
100%
group companies, for example, sale of
goods but also service charges
Factory Distributor These intercompany transactions
should adhere to the ‘at arm’s length’
principle (as if third parties)
Factory Distributor
Sales revenue € ??? Sales revenue € 2000
Examples
Purchase costs € 500 Purchase costs € ??? from a tax team viewpoint
Production costs € 500 Sales costs € 150
Intercompany setup
Other costs € 200 Other costs € 50
Monitoring
Profit before tax € ??? Profit before tax € ???
Price and adjustment calculations
Tax 15% € ??? Tax 30% € ??? Specific substantiation and
Profit after tax € ??? Profit after tax € ??? compliance

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What is transfer pricing?
Transfer pricing methods to arrive at an “at arm’s length” price

Which transfer pricing method is most suited for finding an at arm’s length price often depends on the
specific situation.
The OECD Transfer Pricing Guidelines 2022 lists several TP methods:

Traditional
Transactional
Transactional
Profit Methods
Methods

Comparable Transactional
Resale Price Cost Plus Profit Split
Uncontrolled Net Margin
Method Method Method
Price Method Method

Comparability analysis / Compare a single transaction Compare the profitability of a

“Benchmark” approach: price to other transaction pricing company to the profitability of
comparable companies

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What is transfer pricing?
Typical challenges

Holding
100%

Factory Distributor

Typical challenges
1. Calculate and use the correct
pricing between group entities
2. Allocate all indirect costs to the
correct entity
3. Monitor profitability and make
pricing/adjustment calculations
4. Collect the right data for
compliance, management insight,
and tax controversy

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What is transfer pricing?
Today’s TP world – Importance of transfer pricing

What’s always been there What’s new What’s coming

with transfer pricing with transfer pricing with transfer pricing

Complexity, high impact, hand- Increased regulation – global Targeted audit focus, systems-
offs between functions and local – stronger technology based audits, greater public
options disclosure

Spreadsheet usage, data Better advisor expertise, Widening of disclosure

quality, interaction with other increased tax awareness requirements and thresholds,
taxes during finance transformations further technology
improvements

! TP is under increasing scrutiny from global tax authorities, so this process has to be performed to the
highest standards and with a robust and clear reporting capability in an automated manner.
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Thank you.
Contact information:

[email protected]
Follow all of SAP

www.sap.com/contactsap

© 2024 SAP SE or an SAP affiliate company. All rights reserved.

No part of this publication may be reproduced or transmitted in any form or for any purpose without the express permission of
SAP SE or an SAP affiliate company.

The information contained herein may be changed without prior notice. Some software products marketed by SAP SE and its
distributors contain proprietary software components of other software vendors. National product specifications may vary.

These materials are provided by SAP SE or an SAP affiliate company for informational purposes only, without representation or
warranty of any kind, and SAP or its affiliated companies shall not be liable for errors or omissions with respect to the materials.
The only warranties for SAP or SAP affiliate company products and services are those that are set forth in the express warranty
statements accompanying such products and services, if any. Nothing herein should be construed as constituting an additional
warranty.

In particular, SAP SE or its affiliated companies have no obligation to pursue any course of business outlined in this document or
any related presentation, or to develop or release any functionality mentioned therein. This document, or any related presentation,
and SAP SE’s or its affiliated companies’ strategy and possible future developments, products, and/or platforms, directions, and
functionality are all subject to change and may be changed by SAP SE or its affiliated companies at any time for any reason
without notice. The information in this document is not a commitment, promise, or legal obligation to deliver any material, code, or
functionality. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ
materially from expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, and they
should not be relied upon in making purchasing decisions.

SAP and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered
trademarks of SAP SE (or an SAP affiliate company) in Germany and other countries. All other product and service names
mentioned are the trademarks of their respective companies.
See www.sap.com/trademark for additional trademark information and notices.
Week 3: Transfer Pricing
Unit 2: Margin Monitoring
Margin monitoring
Transfer pricing methods – Recap

Which transfer pricing method is most suited for finding an at arm’s length price often depends on the
specific situation.
The OECD allows the following TP methods:

a
ta fit
pe get me
en ro
ge
Traditional

ta ssu
rc p
Transactional
Transactional

A
Profit Methods
Methods

r
Comparable Transactional
Resale Price Cost Plus Profit Split
Uncontrolled Net Margin
Method Method Method
Price Method Method

Comparability analysis / Compare a single transaction Compare the profitability of a

“Benchmark” approach: price to other transaction pricing company to the profitability of
comparable companies

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Margin monitoring
Calculation of profit and tax per legal entity

§ In a really simplified form, a multinational group

consists of a headquarter and legal entities, for Headquarter
example, 1 or more legal entities per country.
§ Corporate income taxation in its foundation starts
with the profit of the legal entities on which you can Legal Legal Legal
calculate tax. entity entity entity
§ As addressed in the previous unit, transfer pricing
is about establishing functional and economic
reasoning for the profitability of entities within a
multinational group.
§ This can bring additional complexity if a legal entity
performs different functions in the group, which Profit Profit Profit
may represent different transfer pricing models. We
will show this on the next slide.
Tax Tax Tax

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Margin monitoring
Example: conceptual segmented P&L for transfer pricing

O
ma pera
r t
be gin % ing
im p
Headquarter act will
inte by ed
rco
pri mpan
cin
g y
Legal Legal Legal
Entity Entity Entity
NCPM
Manufacturing Profit 5%
%

Distribution Profit OM% 4%

Warehousing Profit BR 0.9

Profit
Aftersales and services Profit OM% 1%

Tax TP functional segment Applied profit level Target

(TPF) indicator per TP operating
segment margin %
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Margin monitoring
Example: P&L segmentation approaches

Functional Segment 1 Functional Segment 2

(e.g. limited risk distributor) Legal Entity (e.g. contract manufacturer) R Revenue component
P&L
C Cost component

Direct Direct: allocation of an

R entire component to a
Sale single functional segment
Indirect Indirect (e.g. marketing cost)
R
Indirect: proportional
C allocation of a component
to multiple functional
COGS segments based on
C allocation keys (e.g. IT
costs)

C Manual: allocation of a
component to multiple
OPEX functional segments using
Manual Manual manual schedules based
C
on multiple allocation
keys
Fixed profit 4% OPM Fixed profit 5% NCPM
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Margin monitoring
Key calculations and adjustments that typically form part of a transfer pricing process

Price setting In-year adjustment Year-end true-ups

Using forecast data, ensuring Using actuals and forecast Using actuals data, ensuring
inter-company prices are set data, ensuring inter-company inter-company prices are set
correctly as per the TP policy prices are set correctly as per correctly as per the TP policy
the TP policy

Ongoing reporting is required throughout the year to inform key stakeholders of whether arm’s length prices are
being maintained.

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Thank you.
Contact information:

[email protected]
Follow all of SAP

www.sap.com/contactsap

© 2024 SAP SE or an SAP affiliate company. All rights reserved.

No part of this publication may be reproduced or transmitted in any form or for any purpose without the express permission of
SAP SE or an SAP affiliate company.

The information contained herein may be changed without prior notice. Some software products marketed by SAP SE and its
distributors contain proprietary software components of other software vendors. National product specifications may vary.

These materials are provided by SAP SE or an SAP affiliate company for informational purposes only, without representation or
warranty of any kind, and SAP or its affiliated companies shall not be liable for errors or omissions with respect to the materials.
The only warranties for SAP or SAP affiliate company products and services are those that are set forth in the express warranty
statements accompanying such products and services, if any. Nothing herein should be construed as constituting an additional
warranty.

In particular, SAP SE or its affiliated companies have no obligation to pursue any course of business outlined in this document or
any related presentation, or to develop or release any functionality mentioned therein. This document, or any related presentation,
and SAP SE’s or its affiliated companies’ strategy and possible future developments, products, and/or platforms, directions, and
functionality are all subject to change and may be changed by SAP SE or its affiliated companies at any time for any reason
without notice. The information in this document is not a commitment, promise, or legal obligation to deliver any material, code, or
functionality. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ
materially from expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, and they
should not be relied upon in making purchasing decisions.

SAP and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered
trademarks of SAP SE (or an SAP affiliate company) in Germany and other countries. All other product and service names
mentioned are the trademarks of their respective companies.
See www.sap.com/trademark for additional trademark information and notices.
Week 3: Transfer Pricing
Unit 3: Cost Allocation
Cost allocation
Simple example

Indirect charging using a cost pool/allocation model

Company A buys “low value intra-group services” for A, B, and C.
This cost is brought into the cost pool and allocated to the respective companies.

Group company A Allocated cost: 100 Group company B

+Mark-up: 5

Original cost of provided

services: -300
Group company C
Received allocated cost:
+300 Allocated cost: 100
Allocated cost: 100
Received mark-up: +10 +Mark-up: 5
Cost pool
Profit: +10
Allocation key based on
variable x
1/3 à A
1/3 à B
1/3 à C

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Cost allocation
Potential complexity examples

Indirect charging using a cost pool/allocation model

Potential complexities highlighted in red.
I) Multiple cost items with different treatment, II) volume of cost items, III) cost pooling & allocation software used, IV) multiple and dynamic
allocation keys, V) changing mark-up rates, VI) multiple & varying receiving parties, I-VI) forecasting and true-up calculations, etc.

Group company A Allocated cost: 100 Group company B

Original cost of provided +Mark-up: 5
services: -300 V
I

II
Group company C
Received allocated cost:
+300 Allocated cost: 100
Allocated cost: 100
Received mark-up: +10 +Mark-up: 5 VI

III
Cost pool Group company D
Profit: +10
Allocation key based on
variable x VI

1/3 à A IV

1/3 à B Group company E

1/3 à C

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Cost allocation
Example: conceptual overview of cost allocation process

Calculate service recharge and compare to actual

Identify and Calculate

Invoice monthly
Get budget data allocate service monthly
ERP budgeted ERP
coming FY costs to budgeted
service recharge
recharge service recharge

During the fiscal year

Identify and Calculate true-

Calculate actual
allocate service up and service Invoice recharge
ERP Get YTD actuals YTD service ERP
costs to recharge to (true-up)
recharge
recharge invoice

* Based on complexity and availability of data, a calculation engine like SAP Profitability and Performance Management (PaPM) in
combination with SAP Analytics Cloud may be used to collect data, perform calculations, and report out on allocations and true-up.
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Cost allocation
Demo

M O
DE

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Thank you.
Contact information:

[email protected]
Follow all of SAP

www.sap.com/contactsap

© 2024 SAP SE or an SAP affiliate company. All rights reserved.

No part of this publication may be reproduced or transmitted in any form or for any purpose without the express permission of
SAP SE or an SAP affiliate company.

The information contained herein may be changed without prior notice. Some software products marketed by SAP SE and its
distributors contain proprietary software components of other software vendors. National product specifications may vary.

These materials are provided by SAP SE or an SAP affiliate company for informational purposes only, without representation or
warranty of any kind, and SAP or its affiliated companies shall not be liable for errors or omissions with respect to the materials.
The only warranties for SAP or SAP affiliate company products and services are those that are set forth in the express warranty
statements accompanying such products and services, if any. Nothing herein should be construed as constituting an additional
warranty.

In particular, SAP SE or its affiliated companies have no obligation to pursue any course of business outlined in this document or
any related presentation, or to develop or release any functionality mentioned therein. This document, or any related presentation,
and SAP SE’s or its affiliated companies’ strategy and possible future developments, products, and/or platforms, directions, and
functionality are all subject to change and may be changed by SAP SE or its affiliated companies at any time for any reason
without notice. The information in this document is not a commitment, promise, or legal obligation to deliver any material, code, or
functionality. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ
materially from expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, and they
should not be relied upon in making purchasing decisions.

SAP and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered
trademarks of SAP SE (or an SAP affiliate company) in Germany and other countries. All other product and service names
mentioned are the trademarks of their respective companies.
See www.sap.com/trademark for additional trademark information and notices.
Week 3: Transfer Pricing
Unit 4: Transfer Pricing Compliance
Transfer pricing compliance
Introduction to transfer pricing compliance

TP documentation Local TP reporting

Annually documenting that the arm’s length principle has been applied Annual reporting on TP to
in intercompany transactions local authorities in “TP forms”

Main objectives

Anti-base erosion
Monitoring Risk assessment Tax audit readiness
& profit shifting

Continuously By properly Be prepared for tax Local governments

monitor and documenting the audits and inquires require additional
consider the transfer intercompany by the tax local reports for
pricing requirements transactions, have the authorities monitoring base
when engaging in information readily erosion and profit
intercompany available for conducting shifting
transactions, reflect TP risk assessment
the TP policy in the
reporting processes
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Transfer pricing compliance
A three-tiered approach to TP documentation

As part of the OECD’s BEPS Action 13, the OECD has revised Chapter V of its OECD Transfer Pricing
Guidelines 2022 dealing with procedural aspects of transfer pricing documentation.

Expected:
Public
Country-
by-Country
Reporting

Master File Local File(s) Country-by-Country Reporting

Key information about the group’s Detailed transfer pricing analysis Key financial information on all
global operations, including an of the transactions by the local group members on an aggregated
overview of the company’s taxpayer. National governments basis, with main activity for each
structure from a transfer pricing have different requirements on country which is shared between
perspective content and timing tax authorities

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Transfer pricing compliance
Compliance and other key considerations

Consider TP requirements before

setting up the intercompany prices

Be aware of the time requirements for

submitting/preparing the TP documentation

Take into account the materiality

thresholds, lighter/no reporting obligations
for the transactions up to certain amounts

Obligation to retain documents for a certain

period of time

Conduct periodic reviews/updates to

make sure the information on the TP
documentation is accurate and relevant

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Transfer pricing compliance
Demo

M O
DE

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Thank you.
Contact information:

[email protected]
Follow all of SAP

www.sap.com/contactsap

© 2024 SAP SE or an SAP affiliate company. All rights reserved.

No part of this publication may be reproduced or transmitted in any form or for any purpose without the express permission of
SAP SE or an SAP affiliate company.

The information contained herein may be changed without prior notice. Some software products marketed by SAP SE and its
distributors contain proprietary software components of other software vendors. National product specifications may vary.

These materials are provided by SAP SE or an SAP affiliate company for informational purposes only, without representation or
warranty of any kind, and SAP or its affiliated companies shall not be liable for errors or omissions with respect to the materials.
The only warranties for SAP or SAP affiliate company products and services are those that are set forth in the express warranty
statements accompanying such products and services, if any. Nothing herein should be construed as constituting an additional
warranty.

In particular, SAP SE or its affiliated companies have no obligation to pursue any course of business outlined in this document or
any related presentation, or to develop or release any functionality mentioned therein. This document, or any related presentation,
and SAP SE’s or its affiliated companies’ strategy and possible future developments, products, and/or platforms, directions, and
functionality are all subject to change and may be changed by SAP SE or its affiliated companies at any time for any reason
without notice. The information in this document is not a commitment, promise, or legal obligation to deliver any material, code, or
functionality. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ
materially from expectations. Readers are cautioned not to place undue reliance on these forward-looking statements, and they
should not be relied upon in making purchasing decisions.

SAP and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered
trademarks of SAP SE (or an SAP affiliate company) in Germany and other countries. All other product and service names
mentioned are the trademarks of their respective companies.
See www.sap.com/trademark for additional trademark information and notices.