How geopolitical decisions affect the functional analysis in transfer pricing

This is a publication that is part of RSM’s Voice of SCM. On a monthly basis, RSM issues the Voice of Supply Chain Management (SCM). Our SCM consultants constantly follow global SCM developments and translate their impact into practical considerations for internationally active companies. 

A group’s response to geopolitics can affect its functional analysis in transfer pricing when it changes what entities do, which assets they use or who controls economically significant risks. Tariffs, export controls, energy security, industrial policy and concentration risk now shape supply chain management alongside cost, lead times and operational efficiency. Companies may add suppliers, establish regional production capacity, change inventory strategies or move decision-making responsibilities within the group. These are commercial decisions, but tax teams need to assess whether they alter the operating model reflected in the transfer-pricing policy.

This article was written by Rafi Mardroos (rmardroos@rsmnl.nl) and Iman Zalinyan (izalinyan@rsmnl.nl). Rafi and Iman are consultants with RSM Netherlands with a focus on International Tax and Transfer Pricing.  

How geopolitical risk changes supply-chain design

Cost, skills and scale have long influenced where companies manufacture. Quality and price guide sourcing, while efficient inventory and logistics keep goods moving. Companies must now weigh those considerations alongside security of supply, exposure to particular jurisdictions, access to energy and critical inputs, tariff costs and the ability to serve customers when international trade flows are disrupted.

European policy developments illustrate this shift. On 4 March 2026, the European Commission proposed the Industrial Accelerator Act. The proposal introduces targeted ‘Made in EU’ and/or low-carbon requirements in public procurement and public-support schemes for selected strategic sectors, including steel, cement, aluminium, cars and net-zero technologies. It still needs to be negotiated by the European Parliament and the Council. The proposal nevertheless shows how origin, resilience and production location are becoming commercial considerations in supply-chain design.

Export controls also influence these decisions. On 14 September 2026, the Commission adopted an update to the EU dual-use control list, adding and amending controls for sensitive technologies, including certain semiconductor manufacturing equipment and advanced computing items. The updated list is subject to the usual scrutiny period before publication and entry into force. For companies in affected sectors, such changes can influence supplier selection, technology flows, production planning and the jurisdictions from which particular activities can be performed.

Not every regulatory or geopolitical development requires a supply-chain redesign. When a group does make changes, it may accept a higher unit cost to secure a second source, shorten supply lines, produce locally, access a strategic market or reduce dependence on one supplier or region. The tax function needs to understand those choices and their practical consequences, and check whether the assumptions behind the existing structure still hold.

When supply-chain changes affect the functional analysis

A functional analysis examines the economically significant activities and responsibilities of the parties to an intercompany transaction, the assets they use and the risks they assume. The event that prompted a supply-chain change provides context. The transfer-pricing outcome depends on what the group changed in response.

Consider a group that buys a critical component through a central procurement function and manufactures the finished product in one location. The group decides to qualify additional suppliers and establish European production capacity to reduce concentration risk. The existing transfer-pricing model may still be appropriate if responsibility for key commercial decisions on sourcing strategy, production footprint, inventory levels and allocation of scarce capacity stays the same. If decision-making authority, economically significant activities or control over supply-chain risks move to another entity, the functional analysis may need to be revisited.

Intercompany agreements and transfer-pricing documentation can remain unchanged for years while supply chains evolve. During rapid operational change, that gap can become significant. An entity may still be described as a routine manufacturer after it has begun selecting alternative suppliers, setting production priorities or managing scarce capacity. A procurement company may still be paid as a standard service provider even though its team has taken on a more strategic role in securing critical materials.

A change in activity does not automatically require a different profit level; transfer pricing remains fact-specific. If the documented model no longer reflects the business, the group needs to understand the new functional profile before deciding whether the characterisation, pricing method or remuneration remains appropriate.

Identifying who controls supply-chain risk

Geopolitical and supply-chain pressures require management to decide whether to establish a second source, hold more buffer inventory, invest in redundant capacity, respond to an export restriction or shift volumes between plants. Under the transfer-pricing framework of the Organisation for Economic Co-operation and Development (OECD), control over risk requires the capability and authority to decide whether to take on a risk and how to respond to it, as well as actually making those decisions. One entity may carry out day-to-day risk mitigation while another retains the economically significant decisions. A local team initially tasked with implementing central policy may gradually acquire decision-making authority because the business needs faster or more specialised responses. The functional analysis should reflect who makes those decisions in practice.

New production capacity can bring plant and equipment, technical employees, local know-how and decisions on capacity utilisation into another jurisdiction, while production is reduced elsewhere. A supply-chain decision to improve resilience therefore raises transfer-pricing questions: which functions and risks have moved, have assets or know-how been transferred, and how should the entities involved be characterised after the change?

Procurement can change in much the same way. A team that once executed purchases from approved suppliers may start mapping strategic dependencies, qualifying alternatives, negotiating access to constrained capacity and deciding how to diversify sourcing. These activities do not automatically make procurement a high-value function. The assessment depends on whether the team implements decisions or has the capability and authority to make them.

How to review transfer pricing after supply-chain changes

Manufacturing, sourcing and inventory decisions remain commercial decisions. Involve tax early enough to check whether the intercompany agreements, functional characterisation and pricing policy reflect how the business will be organised and managed.

Four questions can help structure that review

What is changing? 

Map the operational changes before assessing the tax outcome. Which activities, employees, assets and decision rights are moving? Is the company changing supplier or shipping route, or creating new capabilities in another entity or jurisdiction?

Who makes the key decisions? 

Identify who decides whether to take on the relevant supply-chain risks and how to respond to them. Look at decisions on supplier diversification, inventory buffers, production capacity and allocation of scarce inputs, then compare that authority with the entity’s role in the intercompany agreement.

Does the transfer-pricing model still fit? 

Compare the functional analysis, characterisation and intercompany agreements with the business after the change. If a routine entity has gained significant functions, or activities have been reduced elsewhere, check whether the pricing policy and documentation still reflect the arrangement in practice.

Are SCM and tax reviewing the same operating model? 

Supply-chain teams understand why sourcing, production and logistics are changing; tax understands how those facts affect the delineation of intercompany transactions. Reviewing the changes together helps identify transfer-pricing consequences before the new structure becomes established.

A group may deliberately accept a more expensive, regional supply chain or redundant capacity to improve resilience, market access or continuity of supply. These choices do not dictate where profit should be allocated. They do require a check that functions, assets and control over risk remain where the transfer-pricing model places them. That review is most useful while the group is planning the changes, when SCM and tax can work from the same understanding of the future business.

RSM is a thought leader in the field of supply chain management including ESG. We provide frequent insights through training and thought leadership, based on detailed knowledge of industry developments and practical application gained from working with our clients. RSM helps companies connect individual geopolitical and regulatory developments to the broader changes affecting their supply chains. By doing so, we support businesses in distinguishing short-term disruption from structural change and translating that assessment into coordinated decisions on sourcing, origin, landed cost, logistics and supply chain design. If you would like to discuss what these connected developments mean for your business, please contact one of our consultants.