From compliance to resilience: adapting transfer pricing in a rapidly evolving world

The world is at war. What we face today transcends a mere difficult business cycle: active military conflict in the Middle East, heightened risks in the Strait of Hormuz, disruptions in Red Sea shipping, and volatile fluctuations in oil and energy prices. As multinational enterprises contend with weakening currencies in their primary cost centres, governments grappling with widening fiscal deficits are likely to leverage tax and transfer pricing enforcement as potential revenue tools.

At the time of writing, there remains a reasonable possibility of de-escalation. Ceasefires may take hold, shipping routes could reopen, and energy markets might stabilise. If that occurs, much of this discussion will be rendered moot, allowing us to return to the comfort of our daily morning coffee and quarterly benchmarking routines.

However, as Chatib Basri, Indonesia’s former minister of finance, elegantly noted in an article quoting Albert Camus’s The Plague: “When a war breaks out people say, ‘It’s too stupid; it can’t last long.’ But though a war may well be ‘too stupid’, that doesn’t prevent its lasting. Stupidity has a knack of getting its way; as we should see if we were not always so much wrapped up in ourselves.”

We have witnessed similar dynamics before. In early 2020, many regarded COVID as a temporary disruption – perhaps just a few weeks or months before a return to normality. Then, in a sudden shift, a global lockdown emerged that persisted for years, rewriting supply chains and prompting the OECD to issue emergency transfer pricing guidance. The instinct to assume that everything will revert to normal swiftly is natural, yet history has proven that this assumption is often incorrect. Thus, betting on a quick return to normality is not a prudent strategy.

The broader point is clear: the world is currently steeped in uncertainty, and this is likely to persist. Whether it is this war, a future supply shock, a new sanctions regime, a commodity price surge, or an unforeseen crisis, the questions addressed in this article extend beyond any single conflict. They are relevant whenever the stable foundations of a transfer pricing policy begin to crumble. Organisations that engage with this material and develop their frameworks now will have a valuable reference point ready for when calm waters inevitably give way to turbulence.

This piece is crafted with both scenarios in mind. If conditions normalise swiftly, the insights provided may not require immediate action. However, it is essential to retain this information, as uncertainty will remain a constant. When disruption inevitably strikes, the strategy and frameworks outlined here will prove indispensable.

Most of the discussion about transfer pricing in the context of uncertainty tends to follow a familiar narrative: comparables, losses, financial transactions, and the customary reminder that each case hinges on its specific facts. While none of this is incorrect, it is essential to probe deeper.

The critical question is not whether a benchmark range can still be defended with sufficient adjustments; instead, it revolves around whether the transfer pricing model accurately reflects how the business is currently being operated.

Conflict does not merely influence prices; it alters behaviour, disrupts logistics, reshapes procurement practices, and compels management to make decisions that would not typically arise in a stable environment. Shipping routes are modified, supply contracts are reassessed, and credit terms may be tightened or extended. Emergency costs emerge, and liquidity is safeguarded more aggressively. In extreme situations, management shifts its focus from pursuing efficiency to managing exposure.

Once this shift occurs, a transfer pricing policy designed for stability may remain intact in form. Yet it can progressively diverge from commercial reality. The distributor may retain the same label, and the manufacturer may still occupy the same box, but their actual operations have transformed. If the policy fails to evolve alongside these changes, the documentation and pricing strategy will begin to defend practices that the business no longer employs.

That represents the true wartime transfer pricing trap; not only the volatility of the data, but also the widening gap between policy and behaviour.

Southeast Asia finds itself in a notably vulnerable position. As a net importer of refined petroleum, the region is situated on shipping routes susceptible to disruption. Its manufacturing sectors rely on dollar-denominated raw materials while local currencies continue to weaken, compounded by several governments grappling with fiscal deficits that exert direct pressure to increase tax revenue.

Indonesia exemplifies this dynamic effectively. As a net oil-importing economy, a sustained rise in global oil prices would widen the current account deficit, escalate fuel subsidy expenditure, and place additional pressure on the rupiah. Should this lead to slower growth and reduced corporate profitability, tax revenue will likely diminish. When revenue deviates from budget targets, the established pattern across jurisdictions is clear: tax authorities ramp up audit activities, and transfer pricing – being one of the most lucrative areas for scrutiny – often attracts increased attention.

The Indonesian tax authority has significantly advanced its enforcement capability. With compliance risk management systems, big data analytics, cross-referenced taxation data, and a consolidated framework under Minister of Finance Regulation 172/2023, the Directorate General of Taxes now possesses tools that were unavailable five to ten years ago. This is no longer a jurisdiction where a well-prepared local file suffices to avoid scrutiny.

Vietnam, Thailand, and the Philippines are facing comparable pressures. Throughout the region, imported inflation, currency weakness, and revenue shortfalls are likely to drive more assertive enforcement. Organisations operating in these countries should begin their preparations now, rather than waiting for an audit notification to arrive.

Energy-intensive manufacturing, airlines, automotive groups reliant on imported inputs, and consumer goods companies facing margin compression are currently the most vulnerable to risk. Costs have surged sharply, while pricing power has not kept pace. For example, a contract manufacturer benchmarked at cost plus 8% whose cost base has increased by 25% may create a price that the buying entity simply cannot absorb. What options are available in such a situation? Should you adjust the mark-up? Exclude extraordinary items from the cost base? Completely revisit the functional characterisation? Each of these choices carries distinct consequences and will be subject to close scrutiny.

Commodity exporters, mining groups, and upstream energy companies confront a different facet of the same issue. During downturns, the primary dispute often revolves around who bears the losses. In conflict-driven price cycles, however, the dispute may shift to who reaps extraordinary profits. For instance, a coal producer selling to a related trading entity at a price linked to the international coal index, and witnessing fluctuations of 20% to 40% within a quarter, faces a scenario where even a week’s difference in the pricing date can result in tens of millions in taxable profits shifting between jurisdictions.

On the other hand, producers of essential goods, infrastructure service providers, and well-structured financing hubs find themselves in a more favourable position. However, their risk does not stem from weakness. A subsidiary generating unusually high returns in a low-tax jurisdiction will inevitably attract scrutiny, regardless of the commercial justification.

The specific disputes anticipated in this article – such as benchmark data lagging behind current realities, losses reported by limited-risk entities, scrutiny of year-end adjustments, tax authorities employing hindsight, and intercompany agreements that no longer accurately reflect actual business practices – are not new. These issues emerged in nearly identical forms during the global financial crisis of 2008–09, observed across jurisdictions with little in common.

A comparative survey published by the International Bureau of Fiscal Documentation (IBFD) detailed the emerging pattern. Reduced tax revenues compelled authorities to intensify transfer pricing audits. Historical benchmark data compiled during periods of economic growth became outdated, and the time lag in data sampling shifted disputes to different points within the interquartile range. Entities routinely classified as low risk were often treated as if they bore no risk at all. Loss-splitting strategies raised unresolved questions regarding decision-making authority and intangible ownership. Furthermore, year-end adjustments triggered scrutiny from authorities, while existing advance pricing agreements faced demands for revision. Hindsight allowed authorities to assess transfer prices using information that was not available at the time the pricing decisions were made (see “Transfer Pricing Practice in an Era of Recession”, IBFD International Transfer Pricing Journal, 2009). This assessment was made in 2009, and the underlying gaps remain unresolved.

When COVID emerged a decade later, the same questions resurfaced. The OECD responded by issuing dedicated guidance acknowledging the comparability challenges posed by the pandemic. It noted that limited-risk entities could incur losses under genuinely exceptional circumstances and emphasised the importance of contemporaneous documentation for decisions made during the crisis period.

The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations remain the essential reference for practitioners. Accurate delineation, realistically available options, and risk allocation based on control and financial capacity are all directly applicable. However, practical gaps still exist. The loss guidance acknowledges that limited-risk entities can incur losses under exceptional circumstances but fails to define what qualifies as “exceptional”. Additionally, the financial transactions guidance was developed during a time of historically low interest rates and stable credit markets. While the comparability guidance provides a framework and direction, it does not offer practical solutions.

The tension between ex ante versus ex post assessments complicates matters further. Prices set in January 2026 based on available information may yield outcomes in December 2026 that no independent party would find acceptable. While the OECD recognises the need for adjustments in such cases, it does not provide a comprehensive resolution. As a result, practitioners must exercise discretion, and this judgement should be documented before an audit takes place, rather than being constructed afterwards.

Most multinational groups have business continuity plans in place for operational disruptions, but very few have equivalent plans for transfer pricing. That gap needs to be addressed.

A transfer pricing contingency plan is essential. It serves as a standing framework that outlines how the group will respond when extraordinary conditions disrupt the assumptions underlying its intercompany pricing. At a minimum, the plan should encompass the following elements.

First, implement real-time documentation protocols. Stop viewing transfer pricing as something that can be fixed after year-end. In a wartime or crisis environment, it is imperative to build the factual record while decisions are being made. If prices change, document the reasons. If terms are renegotiated, maintain a record of the commercial rationale. If extraordinary costs are borne by one jurisdiction rather than another, diligently document the decision and its justifications. The most common weakness in transfer pricing disputes is not a flawed position but a sound position lacking an adequate evidence trail.

Second, review the operating model on a transaction-by-transaction basis. Not every arrangement needs to be reconstructed; however, aspects such as commodity pricing, procurement hubs, limited-risk distribution, contract manufacturing, intercompany services, and treasury arrangements all warrant immediate scrutiny.

Third, conduct stress-testing of intercompany agreements. Contracts that assume stable freight rates, ordinary lead times, standard financing conditions, and predictable inventory turnover can quickly become inadequate when they no longer reflect the actual business environment. The contingency plan should incorporate a periodic assessment to determine whether key intercompany agreements still align with commercial reality.

Fourth, establish cross-functional governance. Transfer pricing during a crisis cannot be effectively managed by the tax department in isolation. The contingency plan should outline how tax, finance, treasury, legal, and operations collaborate during periods of disruption. Those making commercial decisions must understand the transfer pricing implications, while the transfer pricing team needs to be informed about actual business activities. If these two groups do not communicate in real time, the documentation will inevitably remain incomplete.

Finally, develop the controversy narrative. The plan should incorporate a framework for articulating the commercial story early on. This should not be the final legal defence, but rather the explanation that cohesively supports the position. Questions such as why one entity earned less, why another absorbed the disruption, why liquidity support was extended, and why one return was preserved while another was adjusted must be answered clearly and consistently. A group that can address these questions effectively is already at a significant advantage over one that relies on outdated labels and year-end benchmarks.

Additionally, consider advance pricing agreements or mutual agreement procedure requests when the exposure justifies the investment. Locking in methodology before an audit begins is nearly always preferable to defending one after it has been contested.

The arm’s-length principle remains as relevant as ever, even in uncertain times. What has changed is not the rule but the environment in which it operates. Peter Drucker, the management theorist, articulately captured this sentiment: “The greatest danger in times of turbulence is not the turbulence itself but acting with yesterday’s logic.”

That is the trap we must avoid, and it is where the most valuable guidance lies today.