One of the most common questions in Transfer Pricing is:
“What’s the right profit margin?”
While it’s an important question, it often isn’t the first one that should be asked.
Before discussing margins, we need to understand who is doing what. Which entity performs the key functions? Who owns or develops valuable assets? Who assumes the business risks? These answers form the foundation of a robust Transfer Pricing analysis. Only then does it make sense to evaluate whether the financial outcome aligns with that commercial reality.
In my experience, many Transfer Pricing disputes don’t arise because the margin is incorrect. They arise because the functional analysis doesn’t adequately support why that margin exists.
Margins can be benchmarked. A well-reasoned functional analysis explains the business behind those numbers and that’s often what stands up to scrutiny.
