We Wish You an Arm’s Length Margin and a Happy Year End

As we approach that special time of year when we take a step back and reflect on the financial year we’re leaving behind, let’s spare some goodwill toward the year‑end transfer pricing adjustment. This hallowed tradition, although often met with a grinchy grimace, allows many multinational enterprises to stay aligned with the arm’s‑length principle. This helps to avoid audit headaches, double taxation, and penalty risk.

What they are:

Year-end transfer pricing adjustments are the entries, invoices, and corrections which bring pre-transfer pricing margins up or down to their policy point or range. For example, a limited-risk distributor might have a target policy of a 5% return on sales, but without transfer pricing adjustments, sits at 15% approaching close. A transfer pricing adjustment is needed to bring that margin down to policy.

Why they matter

• Reality vs. budget. Market conditions, foreign exchange, and costs shift—your transfer pricing margins should, too.
• Audit defense. Clean alignment between transfer pricing policy, documentation, financials, and returns is essential to a minimally-painful annual audit.
• Penalty protection. Robust, contemporaneous support is your first line of defense. It depends on your transfer pricing policy being reflected in year-end financial results.

How to make year-end true‑ups boring (and bulletproof)

1. Continuous monitoring. Dry‑run year-to-date results and consider adjusting at least quarterly to minimize the year-end swing.
2. Book before local close. Mirror entries on both jurisdictions’ sides; keep timing and foreign exchange treatment transparent.
3. Label and document. Tie adjustments to contracts, calculations, and business rationale. This is especially important for jurisdictions like Mexico where such support is required to validate any transfer pricing adjustment deduction.
4. Mind tariffs and VAT. In some countries (the US included) year-end adjustments may offer a happy holiday surprise in the form of customs refunds, but only if you know how your policy works and actually make the entries. On the flip side, incorrect or unbooked adjustments may cause significant customs or VAT risk.
5. Move the cash. It may be tempting to book a tax adjustment and pass on the invoicing and settlement. However, this presents risks ranging from withholding tax to deemed interest on outstanding intercompany receivables, and in some jurisdictions may invalidate the adjustment altogether.
6. Be consistent. For most jurisdictions, any point in the arm’s‑length range is fine; however, using a consistent policy and choosing a margin close to the median are risk mitigators.

Quick checklist for December

✅Benchmarking study refreshed?

✅Tested party within IQR/target?

✅Mechanism for correction agreed (and in the intercompany agreement)?

✅Entries posted symmetrically in each set of books pre‑close?

✅Working papers ready (method, data, and calculations)?

Not sure if you’re ready for the annual Carnival of the Calculations? Contact Eide Bailly today for a free year-end compliance evaluation.