Overlooked aspects of transfer pricing

As transfer pricing has recently gained in importance for both taxpayers and tax authorities, many companies have already taken the steps necessary to ensure their intragroup prices are set correctly. Nevertheless, we often encounter situations in which companies pay insufficient attention to these relationships or set them up incorrectly. Prices between related companies may generally be considered in accordance with the arm’s length principle if they are set in the same way as they would be set by independent parties in a comparable market and under comparable terms. Related companies should apply the arm’s length principle to all transactions in which an independent party would expect appreciation/reward for the performance provided.

Intragroup financing

In March 2020, the OECD issued special guidance on intragroup financial transactions, which was subsequently added, as a new chapter, to the OECD Transfer Pricing Guidelines. The guidance addresses the issues of intragroup loans, cash pooling, financial guarantees and insurance. On the basis of the OECD guidance, the following should be done when assessing intragroup loans:
  • identifying the debtor, its industry and life cycle,
  • identifying the loan provided: refinancing options, security, subordination, maturity, amount of principal provided and currency,
  • analysing the debtor’s capital structure in order to determine if the loan provided is a debt or a form of equity,
  • determining the debtor’s and the creditor’s credit risk.
The resulting market interest rate is then established, for example, as the sum of the base rate (e.g. IRS) and the risk spread, i.e. a premium for the risk associated with the provision of funds. The risk spread can be determined using data on the required yield of traded commercial bonds. Each of the above factors impacts on the creditor’s risk, and thus the resulting interest rate. For example, the two-year average IRS CZK rate was 2.06 per cent in 2019, while the two-year average IRS EUR rate that year was negative at -0.03 per cent. This means that a different denomination of the loan causes the resulting interest rate to differ by approximately 200 bps. The rates also vary by industry – while the risk spread median based on the bonds of engineering industry debtors with a credit rating of BB+ to BB- was 1.49 per cent in late 2019, the rate for the food industry stood at 1.02 per cent (data source: Capital IQ database). This is a 45-bps difference.


The sharing of trademarks by intragroup companies is another intragroup transaction to which little attention is often paid. If a company uses a trademark owned by another intragroup party for its business, it should pay the owner a fair value royalty for the use of the trademark. The trademark royalty plays a significant role, especially if the business focuses on consumer goods and services, since the value of the trademark (brand) may create up to 50 per cent of the value of such business. The determination of a fair value trademark royalty may be based on a comparison of royalty rates set out in comparable licence agreements that were entered into by independent companies on the market. Such data is available in commercial databases. RSM CZ uses the RoyaltyRange database for this purpose.

Management and consulting services

Management services are an area that attracts a lot of scrutiny from tax authorities, in particular in terms of the content of the services provided and of evidence that the services have actually been provided. Management service fees are typically derived using a mark-up on the costs. A frequent error connected with the setting of management service fees is that the costs associated with the provision of such services are incorrectly identified or that an inappropriate method for allocating the costs to multiple service recipients is used. A problem may also occur when consulting services (accounting services, financial services, tax and legal advice) are provided by a single employee or group of employees to multiple companies in a group. Our experience shows that one of these problematic situations may typically occur:
  • the service provision costs are borne only by the company providing the services, i.e. they are not allocated;
  • the allocated costs fail to reflect all the costs associated with the provision of the service (it is common that only personnel expenses are allocated, while the costs associated with the job are not);
  • the transfer prices fail to reflect the risk the service provider bears by having to retain additional workforce for the group;
  • costs are allocated on the basis of historic and outdated rules that fail to reflect their current distribution.
In order to ensure that the fees for consulting and management services are set correctly, it is essential to conduct a detailed analysis of the functions and risks of individual companies and select an appropriate transfer pricing method based on the results of the analysis. Are you a member of an enterprise group? Want to ensure your transfer pricing is set correctly? Let us take care of your transfer pricing worries. We are ready to discuss your intragroup relationships with you, suggest possible changes to how your transfer prices are set, and address any other transfer pricing aspects.