Transfer Pricing and Micro-Multinationals

By Angela Sadang  |  February 20, 2017

There is a growing phenomenon in business called “micro-multinationals” and a vexing international tax issue around “transfer pricing” that goes with them.


In this era of the internet, thousands of small to medium sized enterprises (SMEs) also known as micro-multinationals are starting to operate in multiple countries side by side with larger multi-nationals. All that is required is a mobile device, a shipping platform and a big idea.

This is done by combining virtual networks (high speed internet / mobile communications / other digital technologies) and physical networks (transportation systems and logistics platforms) that have the power to open new markets quickly and disrupt industries virtually overnight.

Transfer Pricing and Taxes  

Transfer pricing has been in the internal revenue code for a long time and is a methodology for setting arm’s length prices between related companies in different countries.  The term transfer pricing has long been used in the media as shorthand for multinational corporations shifting profits to lower tax jurisdictions. All companies large and small must deal with transfer pricing in order to “set the prices” of goods, services and intangibles flowing among the related group.

We wrote an introduction to Transfer Pricing in a Marks Paneth blog post last year.

The Tax Justice Network called Transfer Pricing one of the most important issues in international tax law. It comes into play as part of determining tax liabilities across multiple tax jurisdictions.

Proper transfer pricing is a requirement but it can be done inadequately due to lack of expertise or improperly to shift profits by mispricing. This is also known as transfer pricing manipulation or abusive transfer pricing that can understate the value of the transaction and thereby help corporations avoid paying taxes.

Estimates vary as to how much tax revenue is lost by governments due to transfer mispricing. Christian Aid estimated that developing countries lose $160 billion of tax revenue annually to transfer pricing.

On Boarding a New Transfer Pricing Partner  

One of the fundamental challenges when starting a transfer pricing engagement with a new client is acquiring a good general understanding of their business ― and securing sufficient details about the operations ― this is in order to develop the appropriate transfer pricing policy and methodology.

Many small and medium size (SME’s) businesses (micro-multinationals) are generally unfamiliar with the technical language customarily used by the tax organizations of large multinationals. In other words, the tax departments for large multinationals are the ones who usually deal with these issues via their accounting firms. In micro-multinationals, on the other hand, there are seldom accounting departments, so their Founders, COOs or CEOs must deal with these tax matters.

To enable communication and employ language that is familiar to business owners / entrepreneurs -  tools are required that speak the language of business rather than that of tax regulations. 

One such tool, that we have found particularly useful, is business model template that was devised by Alex Osterwalder, (right) the Swiss business theorist.

Marks Paneth has developed a detailed roadmap using Osterwalder’s business model template that helps our clients communicate their business model. The model also provides a coherent view of the business along with the key drivers by defining the “value proposition” as well as the customer revenue side of the business. It also looks at the tax consequences of various revenue streams, i.e. service, sales or royalties? An evaluation of the company’s costs is also undertaken. This information is also very useful in understanding the company’s footprint across different states.

These discussions will familiarize the client with the important elements of transfer pricing and will illustrate how various related parties will work together to contribute to the success of the global enterprise.  Many of the important “covered transactions” which will need to be evaluated to help establish “arm’s length prices” will be identified.

Having established the necessary communication framework, it is then appropriate to begin the systematic task of characterizing and defining each legal entity. Our process examines functions undertaken, risks incurred, functions performed by one legal entity for another, intangible and tangible assets deployed, and the competitive landscape.

An Accurate Business Picture Results: The Foundation for Sound Transfer Pricing Benchmarks

For SME’s that are micro-multinationals, painting this “business picture” is the first step in the transfer pricing exercise.  A process which will become a “rite of passage”, into the global game where tax authorities stake out their claim and exert their taxing rights over multinational companies in order to properly divide the global tax “pie”.

The Marks Paneth global network is a multi-lingual and multi-disciplinary team of experienced professionals who can work with you to get started by designing an efficient transfer pricing model and pricing methodology that aligns with your business.

Angela Sadang – Director / Financial Advisory Services Group

 212.201.3012 |


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About Angela Sadang

Angela Sadang is a Principal in the Advisory Services group at Marks Paneth LLP. Ms. Sadang specializes in business valuations and the valuation of intangible assets and has over 20 years' experience providing corporate financial consulting services and performing valuations. She serves both publicly traded and closely held companies in a wide range of industries that also involves various asset classes. Ms. Sadang is a Chartered Financial Analyst (CFA) as designated by the CFA Institute and is... READ MORE +

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