One of the most fundamental—and profound—questions in transfer pricing is: “What is a related party?” This question frequently arises in joint ventures, private equity portfolios, and complex group ownership structures. The answer typically centers on the concept of common control.
Both the U.S. Section 482 regulations and the OECD Transfer Pricing Guidelines specify that transactions between associated enterprises under common control, direction, or influence are subject to transfer pricing rules. The foundation of these rules is the arm’s length standard, which requires that transactions between related entities be priced as if they were conducted between unrelated parties in an open market.
The most common determinant of common control is common ownership—where the same related-party interests own more than half of the associated enterprises. However, both U.S. and OECD guidance clarify that common control is distinct from common ownership. Even without common ownership, transfer pricing rules may apply if two or more counterparties:
- Share common management or decision-making
- Act in concert with common financial objectives
- Have incentives to shift income or misprice transactions between one another
Most transfer pricing projects I’ve worked on have involved multinational group members under common ownership. However, two major trends are challenging this norm and may significantly expand the scope of transfer pricing rules:
1. Punitive Cross-Border Trade Measures
Importers and exporters could work together to misprice transactions—for example, via allocations between goods and services—to reduce the amount of tariffs.
2. Oligopolistic, Interdependent Supply Chains
Modern supply chains—such as those involving chipmakers, data centers, and artificial intelligence firms—are increasingly characterized by cross-investment and large purchase/supply deals. These tight-knit relationships, even among unrelated parties, may soon be viewed by tax authorities as falling under the definition of common control, especially when concerted action and shared economic incentives are present.
Historically, such cases have been addressed under customs and antitrust laws. However, as tax authorities become more active and aggressive, we may soon see transfer pricing disputes spill over into pricing practices where common ownership is not involved.
Make a habit of sustained success.
