Transfer Pricing for International SMEs: What Small Groups Actually Need

You have entities in two or three countries, $8 million in revenue, and intercompany transactions you price based on what feels right. Tax authorities increasingly disagree with that approach. Here is what small international groups actually need to know about transfer pricing.

When transfer pricing becomes your problem

Transfer pricing rules apply whenever related entities transact across borders. That includes a UK parent paying management fees to its Singapore subsidiary. A German holding company licensing IP to its Irish operating company. A US services firm billing its Netherlands entity for shared software development.

The size of your group does not exempt you from the rules. It exempts you from some documentation requirements in some jurisdictions, but the underlying obligation to price intercompany transactions at arm's length exists from the first cross-border invoice.

Most SMEs discover transfer pricing the hard way: during a tax audit. A local tax inspector reviews your corporate tax return, notices significant payments to a related entity in a lower-tax jurisdiction, and asks for documentation supporting the pricing. If you do not have it, the inspector imposes their own pricing, adjusts your taxable income upward, and charges penalties. In Germany, the penalty for inadequate transfer pricing documentation starts at EUR 5,000 and scales up to EUR 1 million for sustained non-compliance. France applies a 40% surcharge on adjusted income. These are not theoretical risks for small companies; they are standard enforcement outcomes.

The OECD framework (and which parts apply to you)

The OECD Transfer Pricing Guidelines establish a three-tiered documentation standard:

Master file: A group-level document describing the multinational's global operations, transfer pricing policies, and allocation of income. Typically required for groups with consolidated revenue above a threshold (EUR 50 million in many EU countries under the EU directive, though thresholds vary).

Local file: A country-specific document detailing the local entity's intercompany transactions, pricing methodology, and comparability analysis. Required at lower thresholds, often EUR 1 to 5 million in intercompany transactions depending on the jurisdiction.

Country-by-Country Report (CbCR): Required only for groups with consolidated revenue above EUR 750 million. Irrelevant for SMEs.

For a group with $5 to $20 million in revenue, you likely need local files in each jurisdiction where you have intercompany transactions above the local threshold. You probably do not need a master file, and you definitely do not need a CbCR. But "probably" is doing a lot of work in that sentence. The thresholds differ by country, and some jurisdictions (India, notably) require documentation regardless of transaction size.

Which jurisdictions come after SMEs

Not all tax authorities devote equal resources to auditing small international groups. Some jurisdictions are significantly more aggressive than others.

India has one of the most active transfer pricing enforcement regimes globally. The Indian tax authority requires transfer pricing documentation for all international related-party transactions regardless of amount, and audit rates for companies with cross-border payments are high. Indian TP officers routinely make large adjustments, and the burden of proof falls on the taxpayer. If you have an Indian entity paying or receiving from related parties abroad, transfer pricing documentation is not optional.

Germany is equally thorough. German tax auditors are well-trained in transfer pricing, and audits of small companies with international structures are common, particularly if the German entity shows declining profitability while related entities in lower-tax jurisdictions show healthy margins. The Federal Central Tax Office coordinates with local tax offices on transfer pricing matters.

France, Italy, and Australia all have active TP enforcement for mid-market companies. France's threshold for mandatory documentation is relatively low (intercompany transactions of EUR 50,000 or more, plus other triggers), and the tax authority uses data analytics to identify companies with transfer pricing risk profiles.

Jurisdictions like the UK and Netherlands are less aggressive with very small groups but still enforce when they see obvious mispricing. Singapore and Hong Kong typically focus TP enforcement on larger companies, though both require arm's-length pricing by law.

What arm's length actually means for a small group

The arm's length principle sounds simple: price transactions as if the related entities were unrelated parties dealing at market rates. In practice, finding comparable market rates for the specific services your group provides internally is often impossible.

A large multinational can commission a benchmarking study from a Big Four firm, comparing their intercompany royalty rates against a database of comparable license agreements. That study costs $30,000 to $80,000. For an SME with $10 million in revenue, that is not a reasonable expense.

Practical alternatives exist. The OECD guidelines describe five methods, and for most SME intercompany transactions, two are relevant:

Comparable Uncontrolled Price (CUP) method: If you can find a comparable transaction between unrelated parties, use it. This works for commodity-like services (accounting, IT support) where market rates are observable. If your Irish entity charges your UK parent for bookkeeping services, you can benchmark that against what an external bookkeeping firm in Ireland would charge.

Transactional Net Margin Method (TNMM): Compare the net profit margin of the entity performing the service against comparable independent companies. Database tools like Bureau van Dijk's Orbis can identify comparable companies and their margins. A TNMM study for an SME can be prepared for EUR 5,000 to 15,000, which is much more proportionate.

For management fees and group service charges, which are the most common intercompany transactions in small groups, a cost-plus approach often works: document the actual costs incurred, apply a reasonable markup (5% to 10% is common for routine services), and keep records showing the cost base. This is not perfect transfer pricing, but it is defensible transfer pricing, and that distinction matters in an audit.

A realistic TP framework for a $5-20M group

You do not need the apparatus of a multinational. You need enough to survive an audit without penalties. Here is what that looks like:

Step one: map your intercompany transactions. List every payment between related entities. Management fees, service charges, IP royalties, cost recharges, loans and interest. Know the amounts, the direction, and the current pricing basis. Most SME owners cannot produce this list without digging through accounts, which tells you something about how much attention TP has received.

Step two: check documentation thresholds in each jurisdiction. For each country where you have an entity, determine whether your intercompany transaction volume triggers mandatory documentation. A transfer pricing advisor can check this in an hour.

Step three: prepare local files where required. For jurisdictions that require documentation, commission a local file. This does not need to be a 200-page opus. For SME transactions, a well-prepared local file runs 20 to 40 pages and costs EUR 3,000 to 10,000 per jurisdiction. It should describe the transactions, explain the pricing methodology, include a simple benchmarking analysis, and conclude that pricing is arm's length.

Step four: maintain intercompany agreements. Every intercompany transaction should be covered by a written agreement specifying the service, the price, the payment terms, and the basis for the pricing. Tax auditors look for these first. A management services agreement between your UK parent and Singapore subsidiary is not a legal formality; it is your primary defense document.

Step five: review annually. Transfer pricing is not a one-time exercise. If your intercompany transaction volumes or types change, the documentation needs updating. A brief annual review (half a day with your tax advisor) keeps the documentation current and prevents the slow drift that catches companies in audits three years later.

The intercompany loan trap

Intercompany loans deserve special attention because they are the most common transfer pricing mistake in small groups. A parent company lends money to a subsidiary, charges no interest (or a token rate), and assumes this is fine because it is "within the group."

Tax authorities view intercompany loans as transactions that must be priced at arm's length. If your UK company lends GBP 500,000 to your Dubai subsidiary at 0% interest, HMRC may impute interest at the rate an unrelated lender would charge and treat the imputed interest as taxable income in the UK. The rate should reflect the borrower's creditworthiness, the loan terms, and the currency, not the parent's cost of funds.

For SMEs, the fix is simple: charge interest on all intercompany loans at a rate supported by a brief benchmarking exercise. Published rates from central banks plus a credit spread of 100 to 300 basis points typically produces a defensible rate for intragroup loans. Document the rate and the basis. This costs nothing to implement and avoids one of the most common audit adjustments.

What this actually costs

For a group with entities in three jurisdictions and intercompany transactions in the $500,000 to $5 million range annually, a proportionate transfer pricing framework costs approximately:

• Initial mapping and policy design: EUR 3,000 to 8,000 (one-time)
• Local file preparation per jurisdiction: EUR 3,000 to 10,000 each (annual where required)
• Intercompany agreement drafting: EUR 2,000 to 5,000 (one-time, with annual review)
• Annual review and update: EUR 2,000 to 5,000

Total first-year cost: EUR 10,000 to 30,000. Ongoing annual cost: EUR 5,000 to 15,000.

Compare that to a transfer pricing audit adjustment of EUR 200,000 in additional taxable income (not uncommon for service charges that lack documentation), plus penalties of EUR 10,000 to 50,000, plus the advisory fees to handle the dispute. The documentation investment pays for itself with a single avoided audit adjustment.

Start with the intercompany transaction map. If you cannot list every cross-border payment between your entities right now, that is your first problem to solve. Everything else follows from there.