Functional & risk analysis — how much of this can I do myself?
Some of it, yes — and we will say so on the call if that is the honest answer. The parts that are worth paying for are the ones where a missed election, a missed deadline or an unverified threshold costs more than the fee: it documents what each party actually does, which risks each controls and has capacity to assume, and which assets each uses.
What if I have already filed and got it wrong?
That is a common starting point. We re-derive the position, identify whether an amendment or a disclosure route is the right vehicle, and tell you which one preserves the relief that is still available. The order matters more than the speed.
How long will it take?
It depends on the documents rather than on us. Once the pack is complete most filings turn around inside a fortnight; anything that needs a certificate from a tax authority runs on that authority's timetable, which we tell you at the start rather than at the end.
What is a functional and risk analysis in transfer pricing?
It is the written record of what each company in the group actually does: which functions it performs, which assets it uses, and which risks it controls and has the financial capacity to assume. Everything else in a transfer pricing file follows from it. The method is chosen on the strength of that analysis, and the entity identified as performing the significant functions and controlling the significant risks is the one entitled to the residual profit. The others earn a return for the routine work they do. Done properly, the analysis is built from interviews, organisation charts, invoices and the agreements, rather than from a description of how the structure was meant to work.
Our contract says the parent bears the risk, is that enough?
No, and this is the most common finding in a transfer pricing review. A contract allocating risk to an entity that has neither the people to make decisions about that risk nor the financial capacity to absorb it is treated as not reflecting reality. The questions asked are who decides whether the risk is taken, who decides how it is answered when it materialises, and who pays when it does. If those answers name a different entity from the one in the agreement, the analysis follows the conduct. The fix is either to move the decision-making so it matches the paperwork, or to price the transaction on what the parties actually do.
Who do you interview during a functional analysis?
The people who make the decisions, which is rarely the finance team alone. A useful set covers whoever approves pricing and discounts, whoever decides how much stock is held and what happens to it if it does not sell, whoever signs off credit terms, whoever runs the development work, and whoever negotiates with customers. The interview notes matter as much as the conclusion: they are the contemporaneous evidence that a decision sat where the file says it sat. Where the answers conflict with the agreements or the invoices, that conflict is recorded and resolved rather than smoothed over, because an examiner will find it in the same place.
Does the functional analysis have to be redone every year?
Not from scratch, but it has to be true every year. The practical test is whether anything in the description has changed: a function moved to another entity, a new product line, staff hired or let go where the decisions are made, a change in who carries stock or credit risk, or a restructuring. If none of that has happened, the analysis is confirmed and the benchmarking refreshed. If something has, the analysis is updated before the numbers are, because a change in functions or risks can change which entity is entitled to the residual, and therefore which method fits.
Which company in our group should earn the residual profit?
Whichever one performs the significant functions and controls the significant risks, with the financial capacity to bear them. That is the point of doing the analysis before anything is computed. A distributor that buys at a set price, sells into a market it does not choose and returns unsold stock is doing routine work and should earn a routine return. An entity that sets the strategy, decides what is developed, decides which markets are entered and absorbs the loss when it goes wrong is the residual claimant. Structure charts and legal ownership do not answer the question; the record of who decides what does.
Can a limited-risk distributor report a loss?
It can, but it invites the question, because an entity described as bearing little risk is not expected to absorb market losses. Two answers are possible and they lead in opposite directions. Either the label is wrong and the entity is in fact carrying inventory, credit or market risk, in which case the functional analysis should say so and the return should reflect it. Or the label is right and the intercompany price failed to deliver the routine return the arrangement promised, in which case the mechanism in the agreement should have adjusted it. Either way, the position wants documenting before the loss year is examined rather than after.
What is an intercompany agreement, and do we need one?
It is the contract between the related parties — who does what, who bears which risk, what is charged and on what basis. It matters because when there is no agreement, an auditor prices the transaction from the conduct they can observe rather than from the arrangement you intended, and conduct rarely tells the whole story. Signed agreements that match the invoices and the actual functions are the cheapest transfer pricing protection there is. See our transfer pricing work.
Do we need transfer pricing documentation for a small group?
The obligation follows the existence of cross-border transactions with related parties, not the size of the group — which surprises founders with one foreign subsidiary and a management fee. Size affects which report is required: a local file, a master file, a country-by-country report. In Canada the practical trigger is timing, because documentation prepared by the filing due date is what stands between an adjustment and a penalty on top of it. See contemporaneous documentation in Canada.
