Cabot Transfer Pricing

Functional analysis of intra-group transactions30 May 2024

Functional analysis of intra-group transactions

According to Annex 3 to Order no. 442/2016 of January 22, 2016 regarding the amount of transactions, the deadlines for drawing up, the content, the conditions for requesting the transfer pricing file and the transfer price adjustment/estimation procedure, the transfer pricing file must contain or present the main functions performed , risks assumed and assets by the company for which the transfer pricing file is drawn up and its affiliated parties within the transactions carried out during the period under analysis.

As mentioned in the OECD Transfer Pricing Guidelines, the functional analysis according to the essential determination and presentation of relevant information about the company, with an emphasis on identifying the functions, risks and assets, so as to understand how they are. shared between the companies involved in the analyzed transactions.

Analyzing transactions between two independent companies, the compensation usually reflects the functions assigned to each of them, the business risks assumed by the parties involved and the assets used in these transactions. The more significant the investment in the transaction (represented by the functions and assets involved), the more substantial the remuneration should be. In terms of trading risk, theoretically, the riskier an investment is, the higher the reward should be. In contrast, lower risk should lead to lower but constant returns.

Transfer pricing analysis must therefore take into account the contribution of each group member in terms of functions performed, risks assumed and assets used. In addition, the transfer pricing analysis must consider and evaluate the contractual terms of the transaction, the economic circumstances and the specific business strategies of the company under review.

In order to complete this section of the transfer pricing file, it is necessary to analyze the contracts on the basis of which the intra-group transactions were carried out. Contracts include information about the products sold/purchased, the type of services provided/purchased, the price of the products/services, information about the terms of payment, the validity of the contract, as well as other useful information in order to prepare a functional analysis. In the event that no contracts are concluded between the parties, a description as detailed and as accurate as possible of the manner in which the transactions take place is necessary, so that all the previously mentioned elements result from the description.

Functional analysis is the tool used to establish the functional profile of the analyzed entity. In practice, there are several patterns, such as: manufacturers / distributors / providers with full functions and risks, or manufacturers / distributors / providers with limited functions and risks, which produce / distribute / provide on an order basis.

Manufacturers with limited functions and risks are often involved in manufacturing or assembly processes without control over marketing, sales or research and development activities. The risks assumed by these producers are reduced because they are involved in activities with a lower degree of uncertainty or exposure to market risks. The remuneration of these producers may be lower compared to that of producers with full functions and risks, reflecting the reduced level of responsibility and risks assumed.

Manufacturers with full functions and risks have control over the entire chain of activities, including production, marketing, sales, research and development. The risks taken by these manufacturers are higher because they are exposed to a wider range of risks, such as market fluctuations, technological innovation or legislative changes. The remuneration of these producers is often higher compared to that of producers with limited functions and risks, to compensate for the high level of responsibility and risk exposure.

Distributors with limited functions and risks are involved in the processes of distribution and marketing of goods or services without having control over manufacturing, research and development or advanced marketing activities. The risks assumed by distributors with limited functions and risks are lower because they are involved in activities less exposed to uncertainty and market fluctuations. Remuneration for these distributors may be lower compared to full risk distributors, reflecting the reduced level of responsibility and risk assumed.

Full-featured and full-risk distributors are responsible for all aspects of the distribution and merchandising process, including inventory management, product promotion and sales, and customer relationship management. They face higher risks as they are exposed to price fluctuations, credit risks and other risks associated with distribution and marketing activities. The remuneration of these distributors is often higher as it reflects the high level of responsibility and risk assumed in their activities.

In transfer pricing analysis, it is crucial to correctly identify the functions and risks assumed by each entity participating in the transactions and to establish an appropriate remuneration for each category according to their contribution to the value chain. This is essential to ensure tax compliance and the correctness of the preparation of the transfer pricing file.

Laura Bîrleanu

Junior Transfer Pricing Consultant


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