Do you need transfer-pricing documentation? A 60-second test
Three group companies charging each other arbitrary percentages, with no operating model behind them. Here's how to tell, in about a minute, whether you're exposed.
Most founders don't set out to have a transfer-pricing problem. It arrives quietly. You open a company overseas to hire someone, or to hold a contract, or because a customer asked you to. Money starts moving between the companies, a management charge here, a licence fee there, a loan to get the new entity going. Nobody sits down and decides the numbers. They just … settle.
That's the moment the risk starts. Transfer pricing is simply the rule that transactions between companies you control should be priced as if they were between strangers. Tax authorities in both countries care, because the price decides where the profit lands, and therefore who gets the tax.
Here's a quick way to find out whether you need to take it seriously.
The 60-second test
Answer these honestly. Each "yes" moves you up the risk ladder.
- Do two or more of your companies trade with each other? Management fees, licence or IP charges, intra-group loans, shared staff, goods, or services all count.
- Are those companies in different countries? Cross-border is where documentation rules bite hardest.
- Could you explain, in one paragraph, how each charge was calculated? Not "it felt about right", an actual method.
- If a tax inspector asked "why 8%?", is the answer written down anywhere?
- Has the group grown past roughly 250 staff or €50m turnover (the point at which the UK's exemption for smaller groups falls away)?
If you answered "yes" to 1 and 2 and "no" to 3 or 4, you have exposure that isn't being managed. If you also answered "yes" to 5, documentation is very likely a legal requirement, not a nice-to-have.
The penalty for getting this wrong is rarely the tax alone. It's the tax in two countries at once, each side taxing the same profit, plus penalties and interest, argued years later when the people who set the prices have moved on.
What "good" actually looks like
You don't need a Big-Four-sized report to be defensible. You need three things:
- A functional analysis, a plain description of what each company actually does, owns, and risks. Prices should follow substance.
- A method, chosen deliberately. There are a handful of accepted approaches; the right one depends on the transaction. The point is that you picked one and can say why.
- Contemporaneous evidence. Something written at the time, not reconstructed under audit. A short benchmarking note and intercompany agreements go a long way.
Done proportionately, this is a modest piece of work, and it's the difference between a five-minute conversation with an inspector and a five-figure dispute.
Where founders get caught out
The three patterns I see most often:
- The "round number" management charge. A flat monthly figure between the UK parent and an overseas sub, with no calculation behind it. Easy to challenge, hard to defend.
- The interest-free (or interest-heavy) intercompany loan. Both extremes attract attention. The rate should reflect what an unconnected lender would charge.
- IP that quietly moved. The brand, the software, the customer relationships, if they were built in one country and are now billed from another, that's a transfer-pricing event whether or not anyone papered it.
The practical next step
If the test above put you in the "exposed but unmanaged" zone, the fix is usually straightforward and far cheaper than the alternative: a short review of your intercompany flows, a defensible method for each, and the paperwork to match. That is exactly what our transfer pricing service covers. Get it in place before it's asked for.
If you're not sure where you sit, that's exactly what the Overseas Expansion Diagnostic is for, a red/amber/green read on where your structure creates risk, transfer pricing included.