Transfer Pricing Risk ManagementBy Steven Carey, Transfer Pricing Associates

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Transfer pricing risk arises not only in respect of transfer pricing audits and penalties but in all stages of the transfer pricing process.

In Box 1, lack of clarity of the business model creates misalignment between business reality and the transfer pricing system, which can mean entities are remunerated in a manner inconsistent with their function and risk profile. For example, not clearly defining roles and responsibilities and remunerating a sales agent on a cost plus basis will not be consistent with the commercial objective of maximizing sales. In such case, a commission based transfer pricing model may be more appropriate.

The risk inherent in Box 2 is that economic, legal and this can give rise to is permanent establishment risk if, for example, the sales staff are negotiating, concluding and signing contracts on behalf of an entity resident in another jurisdiction and this is not consistent with the operational or economic allocation of functions, risks and profits between those entities.

To read the full version of this article, please purchase the May 2009 issue of China Briefing, which can be found in the Asia Briefing Bookstore. Companies requiring assistance may contact any Dezan Shira & Associates' nine national offices at china@dezshira.com for advice or visit www.dezshira.com.

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