A functional analysis underpins the selection of transfer pricing methods, making it essential to any transfer pricing review.

What is a functional analysis?

A functional analysis outlines each company's roles, activities, assets, and risks in a group transaction to clarify how value is created and shared. This supports fair and transparent transfer pricing.

Why is a functional analysis important?

• Supports method selection: Guides the choice of the most appropriate transfer pricing method for cross-border transactions.

• Ensures arm’s length pricing: By analysing functions, assets, and risks, it helps set prices comparable to those between independent entities.

• Reduces tax risks: Demonstrates adherence to the arm’s length principle, minimising the risk of audits and penalties.

• Improves comparability: Clarifies each party’s roles, helping to identify suitable comparable transactions.

How should a functional analysis be conducted?

1. Gather data: Start by collecting information on each entity’s activities, assets, and risks.

2. Evaluate contribution: Assess the importance and significance of each entity’s role in the transaction.

3. Document findings: Record conclusions in a detailed report, including the rationale for the chosen transfer pricing method.

Our approach

Our transfer pricing projects begin with a functional analysis of the group and its relevant transactions. We create a customised information request and questionnaire to guide our review of activities and intercompany dealings.

The questionnaire is a starting point for discussion, not a fixed checklist. By working closely with clients and gathering input from key staff, we build a clear understanding of their business and develop an effective approach to evaluating risk and reward for each entity.

Get in touch

Companies subject to transfer pricing regulations should consider seeking professional tax advice to ensure they meet all requirements.

For more information about transfer pricing and how we can support you, visit our designated transfer pricing service page here. Alternatively, if you’d like to speak to our team, please get in touch by filling out the form below.