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Transfer pricing as a supplement to corporate governance

Alejandro Paredes and Rocio Crespillo of Deloitte take a look at the relation between transfer pricing and corporate governance.

Due to decisions that benefit the group as a whole rather than the minority shareholders, minorities within corporate governance might not be properly represented, and their rights and benefits may not be properly exercised.

Intercompany transactions may comply with the arm's-length principle and hence may not be questioned by tax authorities; nevertheless, entities may be operating in such a way that minority shareholders may have a reason to believe that current management has a negative effect on their investments and interests.

As a result of such situations, inquiries related to the application of profit-based methods may arise within corporate governance. When such inquiries arise, it is not uncommon for organisations to turn to transfer pricing for guidance to resolve and prevent disagreements in biased conditions. Transfer pricing proposes a quantifiable assessment and analysis methodology that could be applicable to corporate governance regulations.

Corporate governance implications

Given the previous context, charging a mark-up over the costs and expenses (cost plus method or transactional net margin method) could be considered the best way to establish whether the intercompany prices are within an arm's-length range; however, it is no longer an accurate approach to determine the real benefit or the non-damage from the minority shareholders' perspective. Hence, the previous methods do not give an accurate answer to the questions being asked.

Currently, enterprise groups are considered much more complex in their provision of highly specialised, strategic or confidential services, given the specific business and industry characteristics. It is also worth mentioning that in some cases when entities provide highly specialised, strategic, or confidential services, it is difficult, if not unfeasible, to find comparable services and prices in the market, as well as comparable companies or transactions.

A proper understanding and analysis of the intercompany services are required to prove that intercompany transactions comply with corporate governance and transfer pricing regulations, to prove that intercompany transactions are aligned with efficiencies and synergies, and to prove that intercompany transactions contribute to the social interest of the parties involved at all levels.

Transfer pricing and a wider perspective

As mentioned before, a TP analysis is necessary to determine whether the transactions carried out by members of an enterprise group are compliant with the arm's-length principle, but it is also necessary to comply with the requirements stated in the corporate governance legislation and to give answers to the inquires of the minority shareholders.

To analyse intercompany services provided within an enterprise group, we usually begin with the service provider's perspective, identifying the cost and expenses incurred in the provision of the services and applying an arm's length mark-up. In this sense, we determine the arm's-length price for the transaction from a provider's perspective. However, this analysis does not cover the entire situation. Since the analysis does not evidence the benefit to the company that received the service, there is a need to answer the question from the minority shareholder's perspective.


In not so simple structures, our experience has been to use the comparable uncontrolled price method (CUP) and the residual method (RM), as supplemental approaches, depending on the availability of public information or the provision of internal information, in order to prove the benefit or non-damage to the minority shareholders.

The CUP method compares, for example, rates or prices established between related parties with market rates or prices, and the RM defines comparable rates for which there is no third party available for comparison.

The CUP method usually compares prices and rates of highly comparable products and/or services. The CUP method can be either internal, where prices and conditions of similar transactions between the entity under analysis and an unrelated party are compared, or external, where the comparison is between two unrelated parties.

The RM consists of determining prices or values of operations using other reasonable approaches. This method is applied using the minimum structure analysis, which involves assessing the structure of personnel and the costs and expenses required for an entity to perform the activities in-house, instead of receiving the services from a related party.

In practice, to evaluate the minimum structure that the entity requires to internalise the service received by their related party, a structure is constructed and quantified based on the volume of the business and the services under analysis (i.e. for the provision of billing and collecting services, the volume of invoices is an appropriate indicator). Once a structure is defined, compensation and overhead are defined for each type of professional engaged in the provision of services, and then comparable structures of costs and expenses are associated with the structure. To define compensation and overhead, surveys are used. These surveys, gathered and organised in databases, provide information that is later correlated with the construction of the minimum structure, for example, information that relates job positions to wages.

Finally, the rates and prices are compared between internalising the services and receiving the services from a related entity.

In general, the results obtained from the application of the CUP method or RM help us verify that rates and prices provided by related entities are more efficient than those that would be charged by independent third parties, and that the costs and expenses structure that the entity under analysis would have to assume in case of internalising the service is less efficient.

In most cases, and as previously mentioned, efficiencies align with services being provided by related entities, given that they have specialised skills, know-how, infrastructure, and qualified personnel, among others. Overall, the work performed shows that centralising services provides optimum results for all parties involved, given that they derive in efficiencies, synergies, economies of scale, unification of suppliers, efficient management of resources, more expertise, continuity, and service specialisation, among others.

Formerly, charging an arm's length mark-up over cost and expenses when pricing transactions between enterprises under common ownership or control was sufficient. However, in the present day, and given the complexity of corporate governance and the need to reconcile and prevent disputes where the rights and benefits of minorities are not clearly represented, using solely this approach is obsolete. Applying the previously mentioned TP methods (CUP method and RM) in a customised manner and from a recipient's perspective provides a wider vision range to attest that efficiencies are created in intercompany operations or transactions.

Alejandro Paredes



Tax & Legal Deloitte

Tel: +56 2 2729 8216

Cell: +56 9 6844 4640


A partner and leader of Deloitte's transfer pricing practice in Chile, Alejandro has broad experience advising multinational companies.

Alejandro has more than 14 years of experience delivering a broad range of transfer pricing services such as implementing practical and tax-efficient transfer pricing structures, representing clients in audits from the local tax authorities and advising on transfer pricing controversy matters.

Mining, energy and resources, technology, pharmaceuticals, aviation, consumer products, manufacturing and financial services are some or the industries in which Alejandro has vast experience.


Based in Chile since 2011, Alejandro has also been part of Deloitte's transfer pricing practice in Venezuela and the United States. He speaks Spanish and English. His clients include Latam, Falabella, CGE and Banco Security.


Economist, Universidad Católica Andrés Bello, Caracas Venezuela. Post degree in Marketing from the Universidad Central de Venezuela and in international tax studies from the Universidad de Chile.

Rocio Crespillo



Tax & Legal Deloitte

Tel: +56 227 29 8041


Partner of the transfer pricing practice in Chile.

Has broad experience on financial management of companies.

Has deep knowledge in the Latin American financial services industry, working with banks, insurance companies, stock brokerages and investment funds.

Has a vast experience coordinating regional transfer pricing compliance projects, gaining important Latin American experience in the region's key transfer pricing issues. Rocio has experience in the financial services industry, working with banks, insurance companies, stock brokerages and investment funds.


Rocio has worked in the transfer pricing area in Argentina, Spain and Chile. She speaks Spanish and English. Her clients include Metlife, Santander, SK and Laureate.

Education Background

Economist, Universidad Argentina de las Empresas.

Diploma in Chilean Taxation, Universidad de Chile.

Financial Studies, Centro de Estudios Financieros, Barcelona, Spain.


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