Plain English
The thing being priced. It might be a sale of goods, a service, a licence, a loan, a guarantee, or a business restructuring. Everything else in transfer pricing — the method, the benchmark, the documentation — hangs off correctly identifying what the transaction actually is.
Technical definition
Transactions between two enterprises that are associated enterprises with respect to each other, delineated by reference to contractual terms supplemented and, where necessary, overridden by the conduct of the parties.
Why it matters
Accurate delineation is the step where most disputes are won or lost. If the tax authority characterises your transaction differently — a licence rather than a service, a loan rather than equity — the method and the comparables change entirely.
How it works in practice
- 01Identify commercial or financial relations between the parties.
- 02Compare contractual allocation of risk against actual control and financial capacity.
- 03Aggregate or segregate transactions where they are economically interlinked.
- 04Restate the transaction where conduct differs materially from the written terms.
Worked example
Service or intangible?
A parent charges subsidiaries a fee for centrally developed marketing content. If the subsidiaries receive only a delivered campaign, it is a service. If they receive the right to exploit the brand assets locally, an intangible licence is present and DEMPE analysis follows. The correct characterisation changes the method from cost-plus to a royalty benchmark.
Common mistakes
- Bundling unrelated transactions into a single tested margin to hide a loss-making stream.
- Splitting an integrated arrangement into fragments that no independent party would contract separately.
- Relying on a template intercompany agreement never updated for how the business actually runs.
Audit red flags
- Transaction categories in the local file that do not appear in the ledger.
- Material flows with no written agreement at all.
Documentation & data
Documents to hold
- Transaction matrix by counterparty, type, value and method.
- Intercompany agreements mapped to that matrix.
Data you need
- Intercompany trial balance by transaction type.
- Invoice-level data for at least the tested year.
Who owns this internally: Group tax defines categories; shared service centres usually generate the data.
Jurisdiction notes
- OECD
- Chapter I sets out delineation; non-recognition of a transaction is reserved for exceptional cases.
Notes by role
CFOs & finance leaders
Ask one question each year: does our intercompany transaction list reconcile to the ledger? Surprisingly often it does not.
Frequently asked
- Can a tax authority ignore our contract?
- It can disregard contractual terms that are inconsistent with conduct, and in exceptional cases disregard the transaction entirely where it lacks commercial rationality.
Sources & status
- Primary source
OECD Transfer Pricing Guidelines, Chapter I, Section D.1
OECD, 2022
Reference material only, not advice on a specific fact pattern. Reviewed 2026-06-30.
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