Outdated Transfer Pricing Policies Create New Risks

The Risk of Standing Still

Transfer pricing policies at many private equity management companies (ManCos) were designed for a different era-when overseas offices were smaller and performed limited functions, and tax authorities were less sophisticated. The industry, along with tax enforcement, has evolved. But for many firms, their transfer pricing policies have not.

That gap is where the risk now lies. Driven by the Organization for Economic Co-operation and Development’s (OECD) emphasis on aligning profits with people functions and control of risk, tax authorities are increasingly looking through contractual arrangements to examine what is happening on the ground – and challenging policies that don’t reflect the current reality of the business.

The scale of what is at stake is significant. In the U.S., Coca-Cola faces potential transfer pricing exposure exceeding $18 billion¹ after the Tax Court rejected a methodology the company had used for decades. In Australia, which has been particularly active in transfer pricing audits, the ATO reported that 70% of its active income tax audits of public and multinational businesses involve international related-party dealings and cross-border structures.² These are enforcement realities, and ManCos that rely on static transfer pricing policies are squarely in the zone of risk.

Profits Must Follow People, Functions, and Risk

The OECD’s Base Erosion and Profit Shifting (BEPS) Actions 8–10 emphasize that in cross-border dealings, profits must be aligned with where value is created. For PE ManCos, this means the allocation of profits across group entities must reflect where key investment management decisions are made, where economically significant risks are controlled, and where the people performing these functions are located.

In the United States, the §482 regulations have long embodied a comparable principle-contractual terms, including allocation of risk, will be respected if such terms are consistent with economic substance, with greatest weight given to the actual conduct of the parties and the parties’ respective legal rights.³ Historically the IRS gave considerable deference to contractual arrangements. That posture is shifting. The IRS Transfer Pricing Practice director stated in September 2024 that penalties will be asserted more aggressively, even where documentation exists,⁴ and the Coca-Cola decision illustrates this shift: the Tax Court scrutinized whether the foreign affiliates’ compensation was justified by their actual functions and risks-and concluded it was not.

The OECD’s BEPS framework has globalized these principles, giving tax authorities worldwide both the framework and institutional will to look through contracts and reallocate profits to where people, functions, and risk actually reside.

What the Courts Are Telling Us

Recent litigation has reinforced these principles with real consequences.

One example is Switzerland v. Swiss Investment AG (Administrative Court of Zurich, 2019).⁵ Two individuals ran a PE fund through a Swiss advisory entity and an offshore Jersey general partner (GP) with no employees. The Swiss entity performed all investment advisory functions, while the Jersey entity purportedly “evaluated and decided on” recommendations and “assumed all the risk.” The court looked through the contracts, found that all decisions and risk management resided in Switzerland, disregarded the contractual risk allocation, and reallocated profits accordingly. The message: you cannot allocate risk to an entity that lacks the people and capability to control it.

Coca-Cola v. Commissioner (U.S. Tax Court, 2020; appeal pending, 11th Circuit)⁶ is another example. The IRS rejected a transfer pricing methodology that Coca-Cola had used for decades and that the IRS itself had accepted through multiple audit cycles following a 1996 closing agreement. The Tax Court found the agreement did not bind the IRS going forward, and that Coca-Cola had overcompensated the foreign affiliates relative to their actual functions and risks. With exposure exceeding $18 billion, the lesson is clear: prior acceptance does not mean future acceptance.

The Cost-Plus Question

Many PE ManCos compensate their overseas sub-advisory entities using a cost-plus markup-often between 5% to 15% on operating costs. This approach assumes the overseas entity is performing relatively routine, low-risk functions. But the PE industry has evolved. It is no longer uncommon for a firm’s London, Hong Kong, or Mumbai office to house senior investment professionals who sit on the investment committee, lead deal origination, manage portfolio companies, or serve as primary relationship managers for key investors.

Compensating such an entity with a routine cost-plus return – while the entity performs functions central to the investment management value chain – can be challenging to defend. A rigorous value chain analysis may reveal that a fee-based approach or a profit-split methodology is more appropriate and defensible.

Tax Authorities Are Looking Beyond the Contracts

There has been a big change in how tax authorities gather evidence. They are now looking beyond the transfer pricing report or intercompany agreement provided to them. Inspectors in India request email trails; His Majesty’s Revenue and Customs (HMRC) in the U.K. has proposed evidence logs alongside transfer pricing documentation; other authorities review LinkedIn profiles and compensation data to verify whether roles match their characterization in the transfer pricing report.

This can be particularly problematic for PE ManCos, where senior professionals often wear multiple hats -investment committee member, deal originator, capital raiser, board member – as the gap between contracts and actual conduct can widen quickly and unexpectedly.

Raising the Bar on Transfer Pricing Compliance

In the U.S., the IRS Transfer Pricing Practice director stated in September 2024 that penalties will be asserted more aggressively – even where documentation exists – unless it demonstrates substantive economic analysis.

The U.K. has enacted legislation introducing a new International Controlled Transactions Schedule from 2027 – the most significant change to U.K. transfer pricing rules since 2004 – requiring multinationals to disclose transaction-level detail on all cross-border related-party dealings, including the method applied and margins earned, enabling HMRC to conduct automated risk profiling across its entire taxpayer base.⁷

Meanwhile, EU public country-by-country reporting⁸ is now in effect, meaning profit allocations across European entities will be publicly visible for the first time – creating reputational as well as tax risks.

What PE ManCos Should Do

Conduct a value chain analysis. Map where key investment decisions are made, primary investor relationships managed, risks are controlled, and where people performing these functions are located. Your transfer pricing policies are vulnerable if they don’t reflect this mapping.

Stress test existing cost-plus arrangements. If your overseas office houses investment committee members or senior deal professionals and your policy compensates them at cost plus, you should dig deep into whether the policy is supportable.

Ensure conduct matches contracts. The Swiss Investment AG and Coca-Cola cases both turned on the gap between contractual descriptions and actual functions and risks. Review your intercompany agreements against what people are really doing and update your transfer pricing policies and agreements accordingly.

Don’t assume legacy policies are safe. Coca-Cola demonstrates that a methodology accepted by the IRS at settlement or in some years may not work in the future. Prior acceptance by tax authorities does not guarantee future acceptance.

Prepare for deeper scrutiny. Many tax authorities are checking non-traditional data such as emails, LinkedIn profiles, and compensation data. Your transfer pricing story must be consistent across all of these – not just in the transfer pricing report.

The Bottom Line

As transfer pricing enforcement intensifies, PE ManCos can no longer rely on legacy policies or documentation that does not reflect how the business operates today. A current value chain analysis, updated intercompany agreements, and defensible transfer pricing documentation, can help firms reduce risk and prepare for deeper scrutiny. To assess whether your transfer pricing policies still align with your operating model, connect with CBIZ.

¹ Coca-Cola Co. v. Commissioner, 155 T.C. No. 10 (2020); appeal pending, 11th Cir.
² ATO, Findings report – Public and multinational business disputes and outcomes, 26 September 2025
³ Reg. §1.482-1(d)(3)(ii).
⁴ Brad Anwyll, IRS Transfer Pricing Practice Director, remarks at TEI Transfer Pricing Conference (September 2024).
⁵ Switzerland v. Swiss Investment AG, Administrative Court of Zurich, 2nd Chamber, Case Nos. SB.2018.00094 and SB.2018.00095, decided 18 December 2019.
⁶ Coca-Cola Co. v. Commissioner, 155 T.C. No. 10 (2020).
⁷ Finance Act 2026 (U.K.), Royal Assent 18 March 2026; HMRC, International Controlled Transactions Schedule: Consultation, 2026.
⁸ Directive (EU) 2021/2101, applicable for fiscal years starting on or after 22 June 2024.