Following on from the previous piece on transfer pricing methods, this one covers why you have to bring in outside help at all, and how much of the work to hand over.

The short answer

Outsource the comparability analysis only. The reasoning follows.

Why you cannot do it all in-house

Because, essentially, you cannot. Selecting which companies serve as comparables is the pivotal judgement in the documentation — and if companies could choose freely, they would choose the comparables that suit them.

In an examination, the tax office selects comparables from its own transfer pricing database. So the risk-minimising approach is to run the same exercise: enter the same criteria against a database and arrive at substantially the same set.

The obstacle is cost. Database licences are very expensive, and one company typically produces one transfer pricing document. Paying for a licence and learning to drive it, for a single document a year, is poor economics.

Three levels of outsourcing

The entire documentation

For: you follow instructions; the drafting is handled end to end.

Against: you still have to gather the underlying material yourself; the firm needs to be taught your business from scratch, which consumes a great deal of time; and the fee is very high.

Part of the documentation

For: scheduling and requirements are managed for you, and the firm does not need a complete understanding of your operations. Cheaper than full outsourcing.

Against: drawing the boundary is difficult and tends to blur. Still expensive.

Comparability analysis only

For: dramatically cheaper.

Against: you need working transfer pricing knowledge in the department — at least one person who genuinely understands it — and you draft everything except the comparability analysis yourself.

Recommendation

On cost-effectiveness, and because I think you should have one person in-house who understands the basics regardless, comparability analysis only is the right answer where circumstances allow.

Every company I have worked with took that route but one: a Tokyo Stock Exchange first-section company with revenue above ¥1 trillion and no transfer pricing capability in the department, which outsourced the lot.