Transfer pricing documentation for a logistics group

Background

The client group comprises seven entities active in road haulage, warehousing, customs brokerage and international freight forwarding. Group companies provide services to each other every day: vehicle hire, warehouse leases, management fees and shared dispatch software. Intra-group transactions in the most recent year represented around 38% of consolidated revenue, yet there was no common pricing policy and only two entities had any, rather thin, supporting documentation.

Challenges

• The parent's management fee was allocated at a fixed percentage, unrelated to the actual benefit each subsidiary received.
• Intra-group warehouse rents differed materially from rates charged to third-party customers in the same area.
• Transaction data sat in three different accounting systems, making two-way reconciliation difficult.

Our approach

• Step 1 — transaction mapping: extracted and reconciled 14 types of intra-group transactions and identified those that were material by value and risk.
• Step 2 — functional analysis: interviewed 18 department heads to establish the functions, assets and risks each entity actually performs and bears.
• Step 3 — benchmarking: selected the appropriate pricing method for each transaction group and built independent comparable company sets.
• Step 4 — policy and documentation: drafted a group-wide intercompany pricing policy, a local file for each entity and the related-party disclosure forms required under the transfer pricing rules.
• Step 5 — adjustments: recommended how management fees and warehouse rents should be adjusted for the following year.

Results

Documentation for 100% of material related-party transactions was completed five weeks before the filing deadline. Management fees moved to an allocation based on four measurable drivers (vehicles, warehouse area, headcount and order volume), bringing subsidiary margins within the comparable range. When one entity was subject to a tax audit the following year, the business provided its documentation within three working days. The tax authority's conclusions remain its own independent decision; Corvane supported the client's explanations throughout.

“Good transfer pricing documentation starts with understanding how the business really operates, not with a benchmarking spreadsheet.” — Mr Ly Gia Hung, Partner, Tax Advisory, Corvane Advisory

Lessons learned

Domestic groups often treat related-party transactions as a formality, although the adjustment risk can be significant. Agreeing a pricing policy at the start of the year is far easier than defending figures after the books are closed. Documentation should be refreshed annually alongside changes in the business model.