Transfer Pricing for SMEs: What You Need to Know Before You Get Audited

Transfer pricing is not just for big companies

If your business has entities in more than one country and those entities transact with each other — management fees, IP licenses, shared services, intercompany loans — you have transfer pricing exposure. Tax authorities across the UK, Africa, the US, and Canada are increasingly scrutinising SMEs, not just multinationals. The penalties for non-compliance are substantial.

What is transfer pricing?

Transfer pricing is the price at which related entities transact with each other. Tax authorities require these prices to be set at ‘arm’s length’ — meaning they should reflect what unrelated parties would charge in the same circumstances. If your UK parent charges your Nigerian subsidiary a management fee, the amount must be commercially justifiable.

Why tax authorities care

Intercompany pricing directly affects where profits are recognised and taxed. A management fee charged from a low-tax jurisdiction to a high-tax jurisdiction shifts profit and reduces the overall group tax bill. Tax authorities know this, and they’re investing heavily in transfer pricing audits. HMRC alone has recovered billions in additional tax through transfer pricing adjustments.

The documentation requirement

Most jurisdictions require transfer pricing documentation that explains your intercompany transactions, the pricing methodology used, and the comparable data that supports it. This documentation should be prepared contemporaneously — meaning at the time the transactions occur, not retrospectively when an audit begins. Companies without documentation face an uphill battle in any dispute.

Common intercompany transactions to watch

The most common transactions that trigger scrutiny are: management fees from headquarters to subsidiaries, IP licensing arrangements, intercompany loans (the interest rate must be at arm’s length), shared service allocations, and the sale of goods between group companies.

Getting compliant

If you have intercompany transactions and no transfer pricing policy, act now. The process involves: identifying all intercompany flows, selecting appropriate pricing methods, benchmarking against comparable transactions, documenting the policy, and implementing annual reviews. A cross-border advisory firm can typically complete this in 4–6 weeks. The cost of getting it right is a fraction of the cost of getting audited.