Last week a client told me their refreshed Functional Analysis helped them better understand the inner workings of their business. After riding the initial wave of ego boost, their comment got me thinking about the many ways beyond transfer pricing a good Functional Analysis can benefit a multinational enterprise.
The Functional Analysis is the section of a transfer pricing report which details for each party to the intercompany transactions:
- Functions Performed: description of the specific activities undertaken by each party, such as research and development, manufacturing, marketing, and services.
- Assets Employed: the tangible and intangible assets used or contributed by each entity in the transaction, including machinery, facilities, inventory, intellectual property, and know-how.
- Risks Assumed: the risks that each entity bears in relation to the transaction, such as market, financial, operational, and intellectual property risks.
The Functional Analysis is the basis of a transfer pricing report's economic analysis.
So how might a Functional Analysis prove useful beyond transfer pricing documentation? A few examples from my experience:
- Process documentation for new team members or stakeholders for how intercompany flows and functions are constructed and implemented.
- Internal communication (to C-suite, board, etc.) on how the company's supply and value chains inform financial and tax results.
- Data and analysis for other studies - for example, R&D credit studies.
- Background information for merger and acquisition discussions and due diligence, identifying considerations for post-merger integration
The quality of your Functional Analysis reflects your transfer pricing service provider's understanding of your company. If your Functional Analysis doesn't teach something new or illustrate how your transfer pricing policies align with your business model, it may be time for a change.
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