Small groups do not need an 80-page study. They need five documents, prepared on time

The transfer pricing market has a standard product: the full study, with a functional analysis, database searches and dozens of pages. For a multinational, it makes perfect sense. For a company with €3 million in revenue and a US subsidiary with four people, it almost never does.

But the opposite mistake is more common and more expensive: having no documents at all. My position lies in the middle, and it is concrete.

Let us be honest about the risk in the US

In the US, transfer pricing documentation is not mandatory in itself. It serves as protection against penalties under §6662(e) of the Internal Revenue Code, amounting to 20% or 40% of the tax underpayment. To have that effect, it must exist when the return is filed and be provided within 30 days of an IRS request.

Penalties calculated on the group's net adjustment only kick in above $5 million, or 10% of gross receipts if that amount is lower. A small group rarely reaches that point. But there is a second route that catches companies of any size: the transactional penalty, which applies when the price charged is twice or half the correct price, or deviates even further. A round-number “management fee” with no calculation behind it is a typical candidate.

For small groups, even that is not the most frequent risk. It is Form 5472, with a $25,000 penalty per missing form, and the tax adjustment itself, with interest.

And on the parent company's side

In Portugal, a transfer pricing tax file is only mandatory for companies with turnover of €10 million or more. Below that threshold, the arm's length principle still applies, and the Tax Authority may ask for justification. In Brazil, the regime in force since 2024 introduced new ancillary compliance obligations. In Spain, smaller entities have simplified documentation requirements. In all cases, “we are not required to have a file” does not mean “we do not have to explain the price”.

The five documents

1. Map of the group and its transactions. One page. Which entities exist, who owns whom, how each is taxed in each country and what flows exist between them: services, licences, goods, loans. Half the problems I encounter emerge here, before any calculation.
2. Intercompany agreement signed before the first invoice. It should describe what actually happens: who provides what, to whom, how the price is calculated and when payment is made. An agreement that describes a different company is worse than none, because it proves that reality does not match what is on paper.
3. Pricing policy note. Two to four pages. Which method was chosen and why, which cost base, which margin, with a simple comparables analysis where a margin is applied. This is the document that turns a percentage into an argument.
4. Cost schedule and annual reconciliation. The amount invoiced must match both entities' accounts and the policy. Discrepancies should be explained at year-end, not during an audit.
5. Evidence of performance. Deliverables, reports, sample time records, relevant emails. Services that cannot be substantiated are the first to be denied as deductions.

Form 5472 and the returns in both countries then become the natural result of these five documents, rather than a last-minute reconstruction exercise.

What really makes the difference: the date

The same document is worth much more when it is prepared at the right time. A policy written before invoicing shows intent and consistency. The same policy, written after a notice arrives, looks like a tailor-made justification. And in the US, it no longer protects against penalties.

When to move to a full study

The minimum is no longer enough when the nature of the group changes. In particular:

• an entity's turnover approaches the thresholds that make a file mandatory;
• cross-border licensing or transfers of intellectual property begin;
• the US entity, designated as limited-risk, accumulates losses year after year;
• the team, clients or key functions move to another country.

In these cases, saving on the study usually proves costly. Until then, five well-prepared documents, completed on time, provide more protection than an extensive study that nobody updates.

Learn more about Pactum's transfer pricing study.