Transfer pricing: the document your holding will need

What transfer pricing is

When a US company pays — or is paid by — a related company abroad, that transaction's value cannot be arbitrary. The rule, known as the arm's length principle, is easy to state and hard to improvise: the price should be what independent companies would charge each other in similar conditions. In the US it sits in Section 482 of the Internal Revenue Code; internationally, in the OECD Transfer Pricing Guidelines.

Why it affects small groups

This is not only a multinational issue. A common setup: a US LLC invoices American clients and pays a company in Brazil or Mexico where the team sits. If the LLC overpays, US profit drops and the IRS may challenge it; if it underpays, the local tax authority sees missing profit. Brazil's Law 14,596/2023 aligned its rules with the OECD, making reviews of related-party transactions more technical.

What happens without documentation

Without documentation, a tax review can reclassify payments, adjust prices, assess additional tax and impose penalties — usually years later, when nobody remembers the rationale. In the US, contemporaneous documentation is what protects against transfer pricing penalties.

What a study contains

The study describes the group and entities, the nature of the transactions (services, royalties, loans, goods), each party's functions, assets and risks, the chosen method and a comparables benchmark showing the market range. It comes with a guidance memo that turns the study into practical invoicing rules, and with the intercompany agreements.

When to do it

Ideally before the first payment between the companies, or in the first fiscal year with transactions. Doing it later is possible, but the study then justifies prices already charged instead of setting them.

How Pactum does it

At Pactum, the comparables benchmark is prepared in the US by a team member who is a former tax auditor at the Israel Tax Authority, and the guidance memo is signed by Thiago Vieira, a lawyer admitted in Brazil and Portugal. The plan includes a full economic study, signed guidance memo, intercompany agreements and an annual benchmark update, based on two entities and two jurisdictions — and you can add more as your structure grows.