In today’s increasingly complex and unstable global economy, multinational enterprises (MNEs) are facing a sobering reality: the way value is allocated across their operational models no longer aligns with how risk is actually being borne. While significant attention is traditionally placed on high-value, entrepreneurial activities, the foundational elements of many global businesses—routine operations such as contract manufacturing, limited-risk distribution, and shared service functions—are now disproportionately exposed to the financial and operational fallout of external shocks.

These routine entities, often characterized by low-risk classifications and minimal profit allocations, are designed to operate under stable conditions. However, the last several years have shown that geopolitical tensions, rapid regulatory changes, and sudden trade disruptions tend to strike at the operational level—targeting the very parts of the supply chain presumed to be “safe.” When tariffs are imposed overnight, when customs processes become clogged due to political decisions, or when compliance obligations shift abruptly, it is these routine functions that are expected to absorb the consequences—without corresponding compensation or operational flexibility.

This creates a fundamental tension. Contractually and from a transfer pricing perspective, these entities are not expected to assume significant risk and are therefore entitled only to modest, stable returns. In practice, however, many of them are being forced to shoulder substantial cost burdens and navigate complex disruptions. As a result, some are slipping into sustained losses. Meanwhile, the entrepreneurial entities to which the system’s residual profits are allocated remain relatively untouched, continuing to generate robust margins.

From a business standpoint, this misalignment has consequences that go far beyond compliance. When the economic reality diverges sharply from the transfer pricing policy on paper, it distorts the internal understanding of where value is being created and where risk is being managed. This distortion can undermine budgeting, performance evaluation, and long-term strategic planning. More critically, it weakens business resilience. As market volatility becomes the norm rather than the exception, MNEs that fail to reflect real-world dynamics in their internal pricing models may find themselves unintentionally concentrating exposure in parts of their business that appear stable on paper but are, in reality, highly vulnerable.

Tax authorities are increasingly aware of this disconnect. In recent audits, many have questioned the validity of transfer pricing arrangements where limited-risk entities continuously report losses during periods of disruption while their entrepreneurial counterparts enjoy stable or even rising profits. The response from regulators has been clear: theoretical risk allocation must align with operational substance. Where it does not, enterprises may face audits, adjustments, or penalties—especially in jurisdictions with enhanced transparency obligations and aggressive audit postures.

Transfer Pricing Under Strain: When Models Fail to Adapt

Most transfer pricing models used today were developed under the assumption of relatively predictable operating conditions. They rely on fixed-margin arrangements, historical benchmarking studies, and static functional analyses to guide pricing decisions. These structures assume that routine entities operate within narrow bands of activity, under well-defined risk profiles. However, when those risk profiles evolve—either through internal necessity or external disruption—the transfer pricing framework often fails to keep pace.

For example, a limited-risk distributor that was previously compensated on a cost-plus basis may find itself facing significant increases in import costs due to new trade barriers. Unlike a third-party distributor that could negotiate new terms with its supplier, the related-party distributor is often contractually bound by intercompany agreements that offer little flexibility. As a result, the distributor continues to operate under the same pricing structure but now incurs losses that would be unacceptable to an independent party under arm’s length conditions.

In these cases, the traditional reliance on the transactional net margin method (TNMM) becomes problematic. These methods presume that comparables remain relevant across time and circumstances—but during periods of significant disruption, suitable third-party data may not exist. Without timely adjustments, the routine entity is effectively trapped in a model that no longer reflects its reality.

Recognising Functional Evolution: When Routine Entities Become Strategic
The OECD Transfer Pricing Guidelines provide a pathway for businesses to realign policy with economic reality. One of the central concepts in the Guidelines is that risk must follow control. That is, an entity that actively manages a risk—by making decisions, implementing strategies, and absorbing outcomes—should be entitled to returns commensurate with that control.

This principle opens the door for reassessing the role of routine entities in today’s business environment. Across industries, we are seeing examples where these entities are taking on new and strategic responsibilities. A contract manufacturer may have developed contingency supply routes during a shipping crisis. A service center may have taken the lead in adapting compliance processes to local regulatory shifts. A regional distributor may have actively coordinated responses to government-imposed controls on goods. These are not routine tasks—they represent meaningful value creation and risk management.

When an entity's actual functions begin to diverge from its contractual profile, it may warrant a corresponding shift in how profits are allocated. Under OECD guidance, a revised functional analysis—one that accurately captures decision-making authority and risk management—can support higher compensation levels, even for previously low-margin entities.

The Challenge of Comparability in Disrupted Markets

One of the most difficult technical challenges in this context is the issue of comparability. The arm’s length principle, as applied through traditional benchmarking methods, relies on the ability to identify uncontrolled transactions that resemble the controlled transaction under review. But in moments of crisis or disruption, those comparables often disappear. Companies that once served as benchmarks may exit the market, pivot to new models, or experience their own unique forms of disruption. As a result, relying on historical comparable can lead to misleading conclusions.

This doesn’t mean adjustments are impossible—it simply means they require greater care. Multi-year data sets may help capture trends across volatility, while working capital adjustments can account for inventory and cash flow disruptions. Importantly, these adjustments must be well-documented and grounded in operational data. The objective is to ensure that the internal pricing model continues to reflect the conditions an independent entity would face under similar circumstances.

Timing Matters: Don’t Wait for Year-End

Another often overlooked dimension is the timing of transfer pricing adjustments. In many cases, MNEs wait until the end of the fiscal year to apply any true-ups or corrections. But in today’s environment, delay can amplify exposure. As losses accrue and intercompany charges remain static, the economic mismatch becomes more pronounced. More importantly, delayed action creates documentation challenges, as the rationale for changes is harder to substantiate after the fact.

Instead, businesses should build the ability to reassess their transfer pricing position in real time or at least on a quarterly basis. This may involve governance changes—such as empowering tax or finance teams to flag operational shifts—or system improvements to capture evolving functional responsibilities. The more proactive and contemporaneous the response, the more defensible it will be to both internal stakeholders and external regulators.

Forward Thinking

The central takeaway is this: transfer pricing can no longer be treated as a static compliance exercise. In a world of accelerating change and increasing scrutiny, it must become a living policy that evolves alongside business. For MNEs operating across multiple jurisdictions, this is not a theoretical concern—it is a financial imperative. When routine entities begin to consistently report losses, the implications stretch far beyond tax. They signal a deeper problem in the internal allocation of value, one that can erode profitability, invite regulatory risk, and misinform strategy.

Recognizing this, leading companies are beginning to embed transfer pricing into their broader risk management frameworks. They are updating their functional analyses more frequently, reassessing their assumptions about risk and control, and implementing contingency mechanisms to address future disruptions. By doing so, they not only reduce their audit risk—they also build greater internal clarity around where value is created and protected.
In the end, value creation does not always reside where it’s easiest to measure. Sometimes, it happens quietly—inside a logistics team that reroutes inventory, or a service center that rapidly scales new compliance processes. In a world where these quiet contributions have outsized impact, it’s time for the profit allocation model to catch up.

RSM is a thought leader in the field of transfer pricing consulting. We provide frequent insights through training and thought leadership, leveraging our deep knowledge of industry developments and practical experience working with clients. If you would like to know more, please contact one of our consultants.