Transfer pricing and supply chain realignment: managing risk and opportunity

As global supply chains undergo transformation, driven by geopolitical shifts, trade policy changes, and cost pressures, multinational businesses are re-evaluating their operating models. These changes, while commercially necessary, carry significant transfer pricing (TP) implications. From reshoring production to centralising services and reallocating intellectual property (IP), each move can trigger tax, customs, and compliance risks if not carefully managed.

This insight outlines the key TP considerations for companies navigating supply chain realignment and offers practical views on how to mitigate risk, maintain compliance, and unlock strategic value.

1. TP supply chain realignment in UK reshoring

As companies move manufacturing back to the UK or reconfigure procurement footprints, TP must be realigned to reflect changes in where value is created. A refreshed functions, assets and risks (FAR) analysis is essential to identify which entities now perform critical activities or assume key risks.

• Tested party considerations: Reshoring may change which entity should be the tested party, particularly if the UK entity now bears entrepreneurial risk or controls key functions.
• TP adjustments: Relocation of manufacturing or other functions may require a new pricing approach, a fresh benchmarking or adjustments to existing comparables. The FAR analysis will inform these updates.
• Contract manufacturing models: Require clearly defined roles, defensible markups, and risk allocation aligned with OECD guidelines.

Action point: In case of reshoring ensure you also review intercompany agreements.

2. Customs, tariffs and indirect tax coordination

TP does not operate in a vacuum – TP policies must consider customs valuation, particularly where related-party pricing significantly affects import duties.

• Customs-TP mismatch: The customs value of goods may differ from the TP perspective. This is often due to service or IP-related charges being included in customs valuation, potentially increasing duties.
• Cross-functional coordination: Tax, customs, and finance teams must collaborate to ensure consistent policy application.

Risk alert: Year-end TP adjustments may impact the customs valuation of goods and trigger unexpected duty implications.

3. IP migration and development

Shifting production or development functions can trigger IP migration risks, exit charges, and valuation challenges.

• IP ownership reassessment: If valuable know-how or intangibles are now being created or used in a new jurisdiction, legal ownership and remuneration should reflect this reality.
• Valuation challenges: Where IP or key functions move, exit charges and valuation methodologies must be grounded in market data and properly documented in line with OECD guidance.

Best practice: IP migration can be considered Business restructuring and trigger additional reporting requirements to tax authorities.

4. Cost allocation challenges in TP-aligned supply chain models

Centralising logistics, procurement, or shared services introduces complexity to cost allocation and intra-group recharges.

• Arm’s-length pricing: Support services (e.g. quality control, tech support, back-office) must be priced using defensible cost-plus markups.
• Value-adding or routine: Depending on the sector and business model, centralised services may be seen as value-adding and require stronger economic justification.
• HMRC scrutiny: The UK tax authority increasingly challenges cost allocations that reduce UK taxable profits unless robust evidence supports them.

Solution: Cost allocation should align with the nature of the services provided, using relevant metrics such as production volume, headcount or revenue contribution.

TP as a strategic enabler

In a changing supply chain environment, TP should not just be about compliance. Done well, it supports operational resilience, enhances governance and can unlock long-term value. To achieve this, TP must be embedded in your supply chain decision-making from the outset.

Our TP specialists can help you:

• Forward-looking design: Model and assess the impact of planned business changes on your TP policies, before they are implemented.
• Audit readiness: Prepare and maintain contemporaneous documentation, benchmarking and intercompany agreements to reduce the risk of disputes and penalties.

Contact us to find out how we can support your supply chain evolution with a robust, forward-looking TP strategy.