Transfer pricing is all about substance – Preparing a segmented P&L

 

As per Chapter V, Annex II of the OECD Transfer Pricing Guidelines, multinationals should provide financial information and allocation schedules showing how the financial data used in applying the transfer pricing method may be tied to the annual financial statements.

This section translates into a request to reconcile the financial performance of intercompany transactions to the statutory financial statements of a company. Statutory accounts are a type of financial statement that (most) companies are required to prepare based on national annual accounts laws. Statutory accounts provide detailed information about a company’s financial performance and position, including its income, expenses, assets, liabilities, and equity.

The reconciliation of the financial performance of intercompany transactions to the statutory financial statements is done through the preparation and analysis of segmented profits and losses (“P&Ls”). To prepare a segmented P&L analysis for transfer pricing purposes, you will need to gather financial data for the relevant entities (or branches) that are involved in transactions with one another. This will typically include information on their revenue, costs, expenses, and profit or loss for the relevant period.

Once you have this data, you can use it to calculate the segmented P&L for each entity. This involves breaking down the entity’s revenue, costs, expenses, and profit or loss into different segments, i.e., per intercompany activity (goods, services, financial, and/or royalty) and 3rd party business, with the total reconciling to the statutory accounts. This will allow you to see how each intercompany activity performs and identify areas where transfer prices may need to be adjusted.

We are excited to announce that TaxModel will offer the financial reconciliation feature as the latest feature in its TPdoc transfer pricing documentation platform in the first quarter of 2023.

Learn how to prepare a segmented P&L analysis with our webinar.