What is a secondary adjustment and why is interest being charged?
The primary adjustment changes the taxable profit. The secondary adjustment then characterises the money that never moved. If your profit is increased because an affiliate was charged too little, cash is sitting with that affiliate which, on the corrected pricing, should have come to you. The rules can treat that balance as a deemed loan to the affiliate, and a loan carries interest, which accrues for as long as the balance is outstanding. So the interest is not a penalty on the pricing. It is the consequence of the money having stayed where it was.
How can an adjustment be a loan if no cash ever moved?
That is the objection everyone makes, and it misreads what the adjustment is doing. The tax treatment follows the corrected pricing rather than the bank statements. Once the price is restated, the difference is an amount one group company holds that, on the restated terms, belongs to another. A deemed loan is one way of characterising that position; a deemed dividend is another, with withholding attached instead of interest. Which characterisation applies determines the cost, so it is worth establishing that early rather than after the primary adjustment is settled.
Can I pay the money across to stop a secondary adjustment?
Repatriating the amount is one of the tools that limits the compounding, and it is why the characterisation question has to be settled early. A balance treated as a deemed loan grows with interest for as long as it stays outstanding, so the timing of any repatriation arrangement matters as much as the fact of it. The mechanics vary between jurisdictions and the arrangement usually has to be documented and agreed rather than simply actioned. Model the primary adjustment and its secondary consequences together, because dealing with them separately is what lets one compound.
Will the other country reduce its tax to match my adjustment?
Not by itself. An adjustment in one country does not automatically produce a matching reduction in the other, and until it does the same profit is taxed twice. The treaty's corresponding-adjustment article is the mechanism for asking, and a competent authority request under the treaty is how it is pursued. It is a process rather than a form: the other authority has to accept that the adjustment was appropriate before it will give relief for it. Start it early, and settle nothing on the primary adjustment that you cannot then support to the second authority.
Is a deemed dividend subject to withholding tax?
Where the secondary adjustment is characterised as a deemed dividend, withholding is the attachment, in the same way interest attaches to a deemed loan. That has two consequences worth planning for. The withholding falls due on an amount nobody paid, so the cash has to come from somewhere. And whether the treaty rate applies to a deemed distribution is a question to establish rather than assume, since the answer shapes the total cost. Establish the characterisation before conceding the primary adjustment, not once the assessment has been issued.
How do I stop one transfer pricing adjustment turning into three?
By treating the primary adjustment as the first of a sequence rather than as the whole event. Before you agree it, work out how the resulting balance would be characterised, what interest or withholding follows, whether a repatriation arrangement can close it, and whether the other country will give a corresponding adjustment under the treaty. Those answers can change what you are willing to concede on the primary adjustment itself. Groups that accept the primary figure first, because it looks like the main number, negotiate the rest from a position they have already given away.
What is cross-border tax?
Cross-border tax is what applies when income, assets or people touch more than one tax system at once — someone living in one country and earning in another, a company selling or hiring abroad, a family holding property in a second country. The work is rarely one country's rules applied harder; it is reconciling two sets of rules and claiming the relief that stops the same income being taxed twice at full rates. See what we do.
Is "fund transfer pricing" the same thing as transfer pricing?
No — and if you came here to calculate FTP, this is not it. Fund transfer pricing is a bank's internal allocation of funding costs and benefits between its own business units, a treasury and asset-liability management discipline used to measure branch or product profitability. Tax transfer pricing is about prices between legally separate related parties across borders, and about which country taxes the resulting profit. The words overlap; the fields do not. See our transfer pricing work.
