Transfer pricing in times of chemical downturn

Supplying essential materials to sectors as diverse as healthcare and automotive, the chemicals industry has long been a key pillar of the European economy. However, the sector is experiencing a difficult period due to increased global competition, high energy prices, high production costs, and weak demand. These severe economic circumstances have had an impact on all aspects of operations at chemical multinational corporations, including transfer pricing models.

Centralised transfer pricing models typically attribute stable returns to limited-risk manufacturers and distributors under the transactional net margin method (TNMM) – whether cost-, asset-, or sales-based – so that residual profits accrue to the principal entity. Properly designed, such models can be a lever for strategic value creation, providing greater predictability, stability, and overall tax curtained compared to more decentralised approaches.

However, in economic downturns such as the one currently affecting the chemicals industry, centralised models may create added complexity when allocating profits among group affiliates by applying fixed returns that don’t appropriately reflect the true economic reality of multinational corporations or understanding by the tax authorities.

This leads to the question: how should multinational corporations structure their transfer pricing for the best outcome? Discover how PwC can help by downloading our whitepaper.