Bridging the gap: Linking transfer pricing with corporate treasury

As companies grow and develop across geographies and jurisdictions, the challenges of managing cash simultaneously grow, especially ensuring that each business has access to cash it needs. This is a logistical challenge, managed by corporate treasury teams, and requires careful risk management to ensure compliance with international transfer pricing rules and regulations, managed by the tax function. 

Understanding the fundamental interactions between these functions and connecting them can help business groups save time and money. 

A corporate treasury’s core mandate is to manage a group’s cash. This involves ensuring the right amount of cash is in the right place, at the right time. Treasury teams monitor balances across entities, forecast future needs and facilitate timely payments – whether for payroll, suppliers or tax obligations. More advanced treasury functions also consider available cash and seek opportunities to improve investment returns. 

One of the key challenges is managing cash across borders. Currency differences can create real costs for the group when moving money between bank accounts. In practice, many companies use basic processes to transfer cash between entities, relying on informal intercompany loans or ad hoc bank transfers to meet short-term liquidity needs.  

These transactions, while expedient, often result in a tangled web of undocumented or poorly structured intercompany balances. 

The primary objective of transfer pricing professionals is to meet tax compliance obligations. This is achieved by ensuring the “arm’s length” principle is applied to cross-border transactions. 

These professionals are responsible for setting and adjusting intercompany pricing to meet tax compliance goals. They also monitor intercompany balances to determine when these might be considered loans, rather than trade payables or receivables. If treated as loans, interest must be applied, and additional compliance work is required to demonstrate the arm’s length nature of the loan. 

The point at which this classification changes varies by country and depends on the specific circumstances. Often, the threshold is less than one year, so regular monitoring is essential. When reviewing these arrangements, tax authorities will consider the documented approach in intercompany agreements, making it crucial to align operational processes with the stated approach. 

The key disconnect lies in the lack of understanding between treasury and transfer pricing functions, and the absence of clear processes for managing intercompany transactions operationally. 

For example, consider a group where a treasury moves money between bank accounts in two countries to meet a short-term cash need, and treats this as a non-interest-bearing loan. In this case, the transfer pricing team may be required to treat the movement as a loan and impute interest to comply with the arm’s length principle. This creates additional compliance burdens and may lead to double taxation. 

Alternatively, the transfer pricing team may calculate and invoice significant intercompany management service charges at year-end to meet arm’s length requirements. However, without communication with treasury, no cash planning is undertaken. This results in unnecessary banking costs to meet the cash needs. 

In both scenarios, the teams initiating the transactions are acting rationally and correctly but in isolation, and therefore not optimally when viewed through a broader lens. 

Joining the dots between these two functions enables a simpler structure that benefits both tax and treasury teams. Running transfer pricing calculations more frequently allows cash to be transferred under the terms of intercompany agreements, avoiding the creation of loans. Forecasting these payments helps treasuries plan more effectively, hedge transactions and align payments with revenue cycles. 

This approach offers a straightforward solution that reduces documentation requirements (such as loan agreements and transfer pricing compliance reports) and improves cash management, avoiding last-minute cash needs and enabling hedging opportunities. 

There are challenges to this approach that must be overcome. They include the division of responsibilities between tax and treasury functions, a lack of institutional knowledge about their connection, poor central visibility of relevant transactions and postings and, most commonly, the time and resources needed to implement it. 

Running processes more frequently may seem like more work, but well-structured data and automated systems can quickly repay the investment through improved operational efficiency. 

At S&W, we help clients bridge this gap by creating automated allocation models that apply transfer pricing policies to actual and forecast data. This improved data can then be shared with the treasury, enabling a stronger and more cost-effective intercompany strategy. 

Our operational transfer pricing solutions are designed to integrate with existing infrastructures – whether local tools, finance systems (such as ERP) or consolidation platforms like Workiva and OneStream. 

By embedding transfer pricing into treasury operations, companies gain greater control over their cash, reduce reliance on reactive settlements and improve compliance across the board. 

The interaction between transfer pricing and treasury is not just a technical issue; it’s a strategic opportunity. When these functions collaborate, they can transform intercompany transactions from a source of friction into a driver of efficiency. Whether it’s reducing bank fees, simplifying tax compliance or ensuring timely funding, the benefits are real and significant.