Family-owned groups often charge too little—or too much—between affiliates. Correct pricing starts with mapping who creates value and documenting it.
Why it matters. Tax authorities challenge “one-size-fits-all” 5% service fees or blanket royalties. If group margins cluster suspiciously in low-tax entities without matching functions, expect adjustments and penalties.
Map the value chain. Identify DEMPE functions for IP (Development, Enhancement, Maintenance, Protection, Exploitation). For services, list who performs, controls, and bears risk. For distribution, compare full-risk vs. limited-risk profiles.
Pricing methods. CUP, cost-plus, resale-minus, TNMM—choose the method your facts can support. Sometimes a hybrid model (e.g., cost-plus for back office, TNMM for distribution) makes sense.
Documentation stack. Master file (group overview, intangibles, financing); local file (entity-specific transactions); intercompany agreements (ICAs); and benchmarking studies. Refresh annually; transactions evolve.
Cash mechanics & audit trail. Align invoices, payment terms, and actual cash flows. Reconciliations that match ledger to bank statements build credibility.
Red flags. No contracts; “retroactive” invoices; fees that swing wildly; or IP owned in Entity X while engineers sit in Country Y with no service contract.
Case snapshot. A UAE HoldCo charges 2% management fee to an APAC distributor lacking substance in UAE. After a challenge, the group moves decision-making and analytic teams to UAE, revises fee to a defendable cost-plus, and signs a data-sharing annex.
FAQ
- Is a 5% management fee “safe”? Only if your facts fit. Benchmarking wins, rules of thumb don’t.
- Do we need ICAs if we’re one family? Yes. Formality is the price of cross-border tax certainty.
Editor’s Note: If pricing follows people and processes, audits become explanations—not negotiations.
Tags: Transfer Pricing, Intercompany, Royalties, DEMPE