Transfer Pricing FAR Analysis

Functional Review

Documentation of the daily operations provides a clear picture of the value added by each member of the corporate group. In a transfer pricing far analysis, the focus is on identifying who makes the strategic decisions and who executes the operational tasks. A manufacturing subsidiary that merely follows instructions from a parent company is assigned a different profit profile than one that manages its own production schedules and quality control.

Asset Assessment

Inventory of tangible and intangible assets shows which entity provides the capital and technology necessary for the business. The transfer pricing far analysis distinguishes between the ownership of a patent and the routine use of machinery on a factory floor. Entities that contribute high value intellectual property are entitled to a larger share of the total profit compared to those that only provide standard equipment.

Risk Allocation

Distribution of financial and operational risks determines which party must bear the losses if a project fails or market conditions change. A transfer pricing far analysis verifies whether the entity contractually responsible for a risk actually has the financial capacity and the decision making power to manage it. If a subsidiary bears no market risk, its expected return is typically limited to a small markup on its operating costs.

This analytical depth ensures that profits are taxed in the jurisdiction where the actual economic activity and value creation occur, preventing the artificial shifting of income to low tax regions.