In today’s globalized business environment, companies strive to attract top talent regardless of geographic location. This “best of the best” approach often leads to a geographically spread team of decision-makers. A global management team may either serve as an advisory function or a strong central steering function.
When CEOs emphasize the importance of centralised decision-making and control, it does not necessarily mean that resources are gathered in one jurisdiction. While such a centralized yet geographically spread model makes sense operationally, it poses unique challenges from a transfer pricing perspective. Transfer pricing remains inherently concerned with borders, which ultimately considers where the key management and decision-making powers, as well as risk-taking authorities, are physically located.
The impact of centralized decision-making across jurisdictions
Operational centralization suggests a company within a group operating as the headquarters, driving and steering the strategy and taking key decisions over activities and risks on behalf of the entire group. This is often seen as a way to streamline operations and achieve synergies.
However, the management team’s geographical distribution can complicate this narrative from a transfer pricing perspective. Transfer pricing is fundamentally concerned with how profits (or losses) are allocated across different jurisdictions, and the geographical distribution of key decision-makers plays a pivotal role in this process. Whenever key decision-makers are dispersed in several jurisdictions, value creation is not solely confined to the headquarters but is instead spread across multiple locations. This dispersion requires a deeper analysis to determine how residual means should be distributed among the entities involved, based on where significant functions, assets, and risks are actually situated.
For example, if top executives are located across jurisdictions, their entitlement to group profits must be evaluated through the economic significance of their decision-making, their level of value contributing activities and level of risk-taking. Based on this, adjustments to the transfer pricing policy are typically required.
Additionally, the presence of cross-border decision-making often necessitates robust documentation to support the allocation of group profits. Tax authorities are increasingly scrutinizing the economic substance of management activities, especially when high-value functions such as strategic decision-making, intellectual property management, or control over risk are involved.
Understanding your options
As businesses grow and evolve, it’s crucial to understand the transfer pricing implications of any situation involving geographically dispersed decision-makers. Whether you are already operating with a diverse leadership team or considering moving key executives abroad, being informed about your options and relevant consequences is vital.
Multinational groups should regularly revisit their transfer pricing strategies, especially in light of reorganizations, mergers, or changes in management structure. This is not only about compliance but also about strategic alignment – ensuring that the transfer pricing policies support the overall business goals while adhering to the arm’s length principle.
Engaging with transfer pricing experts can provide a clear picture of how management decisions are valued across the group from a transfer pricing perspective, leading to more informed decisions. A proactive approach, including a review of current transfer pricing policies and continuous monitoring of changes in business operations or organizational structures, can help navigate the complexities and effects of cross-border operations.