Transforming budget insights into a defensible transfer pricing position
In a business environment marked by volatility, a robust and well-designed budget is a strategic necessity. Budgets are the basis for clear internal decision-making, scenario and sensitivity analysis, performance monitoring across business units and alignment with the organization’s long-term strategy.
To preserve transparency, multinationals usually separate TP calculations from their budgeting and reporting cycles, knowing that intragroup transactions can blur how an entity truly performs standalone.
In practical terms, isolating transfer pricing allows management to understand whether a company generates profits or losses before TP adjustments, evaluate whether an entity still contributes strategic value and avoid distorted views arising from short-term group support, intragroup funding, or shared synergies. For example, if an entity consistently records losses before TP adjustments, this may prompt strategic questions: Is this entity still needed? Does its budget reflect a viable business model?
Typically, once the annual budget cycle is completed, companies revisit transfer-pricing policies to set preliminary TP prices for the upcoming year. However, the direction should not be one-way. The budget itself often includes valuable insights that help refine TP models. For instance, updated financial plans may reflect:
- Changes in the functional profile;
- Newly materialized risks;
- Supply-chain redesigns;
- Adjusted business strategies implemented by local or central managers.
Leveraging the objective insights provided by budgets, one of the most underutilized opportunities lies in the Local File requirement. In accordance with the OECD Transfer Pricing Guidelines, the Local File should include a clear description of the business strategy adopted by the entity, an element that is often overlooked. Linking the Local File narrative to the actual financial plan is one of the most efficient ways to produce a strong, defensible TP position.
A budget is not merely a forecast, it is a reflection of strategy, risk management, and how value is created within the organization. As scrutiny continues to rise, Integrating budgeting insights into transfer pricing can strengthen TP defensibility.
In case you are triggered by the above, please feel free to contact rocio.martel@red.tax.
