Transfer Pricing Implications of Business Restructuring

Changes in business models and supply chains have become increasingly common as multinational groups respond to cost pressures, digitalization, geopolitical developments, market expansion, and the need for greater supply-chain resilience. While these changes are usually driven by commercial considerations, they can significantly affect a group’s transfer pricing position.

A restructuring may change the functions performed, assets used, and risks assumed by group entities. As a result, an existing transfer pricing policy may no longer reflect the way the business actually operates. Transfer pricing should therefore be considered as part of the restructuring process, rather than addressed only after the new model has been implemented.

Business Model Changes

Changes such as centralizing procurement, outsourcing manufacturing, establishing regional distribution hubs, or transferring strategic functions between jurisdictions can alter the economic contribution of individual entities. An entity that previously operated as a full-risk manufacturer or distributor may become a routine service provider, while another entity may take on greater strategic responsibilities and risks.

These changes can affect the appropriate allocation of profits within the group. The key question is not simply whether an entity’s profitability has increased or decreased, but whether its functions, assets, and risks have changed and whether its remuneration remains consistent with those changes.

Functional Analysis

The starting point for any transfer pricing review should be a comparison of the business before and after the restructuring. The analysis should identify who performs the key functions, what assets are used, and who controls and bears the economically significant risks.

Particular attention should be given to actual conduct. An intercompany agreement may state that a particular entity bears a certain risk, but this does not necessarily determine the transfer pricing outcome if another entity actually makes the relevant decisions and has the financial capacity to manage that risk.

Changes in Risk Allocation

Supply-chain restructurings often involve a redistribution of risks. For example, inventory ownership may be centralized in a principal company, or a local distributor may become responsible only for routine sales activities.

Such changes can affect the return that an entity should earn. A routine entity would generally not be expected to earn the same level of return as an entity that controls significant commercial risks and makes important strategic decisions. The revised transfer pricing policy should therefore reflect the actual risk profile of each entity.

Business Restructuring and Exit Charges

A significant restructuring may also raise the question of whether compensation is required when an entity transfers or gives up something of economic value. This may include intellectual property, contracts, customer relationships, or other valuable business rights.

However, a reduction in future profits does not automatically create an exit charge. The relevant question is whether something valuable has actually been transferred or surrendered and whether independent parties would have required compensation for doing so. This assessment should be based on the facts and circumstances of the restructuring and supported by appropriate documentation.

Intellectual Property and Value Creation

Changes involving intellectual property, research and development, technology, or brands require particular care. Legal ownership alone does not necessarily determine where the economic value associated with an intangible should be allocated.

The analysis should consider which entities perform and control the relevant development, enhancement, maintenance, protection, and exploitation activities. A restructuring that moves these activities or the associated decision-making to another jurisdiction may therefore require a review of the existing transfer pricing arrangements.

Transfer Pricing Methods

A change in the operating model may also require the transfer pricing methodology to be reconsidered. A benchmarking study prepared for a limited-risk distributor, for example, may no longer be appropriate if that distributor begins assuming significant market or inventory risks.

The tested party, profit level indicator, comparable companies, and arm’s-length range may all need to be reviewed. In more integrated arrangements, a profit split may also become relevant where both parties make significant and unique contributions. The appropriate method should ultimately follow the economics of the revised business model.

Transfer Pricing and Customs

Where the restructuring involves cross-border movements of goods, transfer pricing should also be considered together with customs. Changes in intercompany prices, manufacturing arrangements, or distribution structures may affect customs valuation and create inconsistencies between tax and customs positions.

Early coordination between tax, customs, finance, legal, and supply-chain teams can help identify these issues before the new structure is implemented.

Documentation and Implementation

One of the most common risks is a disconnect between the actual business model and the supporting transfer pricing documentation. Intercompany agreements, functional analyses, benchmarking studies, and transfer pricing policies should therefore be reviewed when a significant restructuring takes place.

The documentation should clearly explain the commercial rationale for the change, the functions and risks of each entity, and the basis for the resulting remuneration. Most importantly, the contractual arrangements and documentation should be consistent with the way the business actually operates.

A Practical Approach

A practical transfer pricing review should begin by documenting the existing operating model and then comparing it with the proposed structure. This allows the group to identify changes in functions, assets, risks, contractual rights, and profit allocation before the restructuring is completed.

The financial impact should also be modelled to determine whether the expected results are consistent with the new functional profiles. This exercise can help identify potential transfer pricing issues early and provide management with an opportunity to address them before implementation.

Conclusion

Changes in business models and supply chains can have a direct impact on transfer pricing because they may change the functions performed, risks controlled, and value created by different group entities.

The most effective approach is to integrate transfer pricing into the restructuring process from the beginning. When the business model, contractual arrangements, actual conduct, financial results, and transfer pricing documentation are aligned, the group is better positioned to support its pricing policy, manage tax controversy, and reduce the risk of unexpected tax exposures.

Ultimately, transfer pricing should follow the business, not the other way around.

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