Transfer pricing is all about substance – Industry Overview

 

In the industry overview of transfer pricing documentation, the multinational should provide a clear outline of the nature and the conditions of the industry and provide context for related party transactions, as follows:

The outline of the industry nature should include the following:

✔️ A description of relevant products and services
✔️ The geographical scope of the markets
✔️ An overview of its leading players

The outline of the industry conditions should include the following:

✔️ An explanation of the power of suppliers and buyers
✔️ The level of competition
✔️ The availability of substitutes
✔️ A description of the barriers to entry, i.e., the threat of new entrants

The above outlines educate tax authorities about the taxpayer’s industry and how the relevant related parties fit into the taxpayer’s operations. They are, in effect, a place (along with the functional analysis narrative) for a taxpayer to “tell its story.” This analysis of the context in which the intercompany transactions take place should provide a sense of the total value the multinational enterprise has created.

If people wonder where to get relevant information, the best sources of information are the multinational’s annual report and/or the marketing department.

In addition, my personal advice is to try to avoid mentioning years and industry financials as this will cause a significant maintenance burden yearly without much value being added. It is however helpful to explain special business circumstances that might have affected results in specific years. For example, is the industry experiencing a downturn? If so, adjustments may be needed to separate the effects of bad risk realization from the effects of intercompany pricing.

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