One of the key challenges arising from the new transfer pricing regulation is the tightening of segmentation requirements. This is especially relevant for meeting transfer pricing obligations for the 2025 tax year, as this is a transitional year during which certain areas may already be subject to the new rules, while others must continue to be handled under the previous requirements.
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Why Segmentation Matters in Transfer Pricing
Segmentation ensures that related-party transactions can be assessed separately and on the basis of a clear functional analysis. It provides the foundation for benchmark analyses, profitability determination, and transfer pricing data reporting (ATP). The new transfer pricing regulation expressly requires profit or loss measurement at the transaction level or, at a minimum, at the activity level, rather than an aggregated approach at company level.
However, this approach is not new; it has merely not been articulated in the regulations in such a precise manner until now. In previous tax audits, the NAV already examined whether the results were genuinely attributable to the relevant related-party transaction(s) and whether activities with different functional profiles were not improperly combined. Thus, the key change is that the regulation now explicitly codifies this principle and requires appropriate segmentation and substantiation, which are essential for ensuring consistency between the documentation and ATP data.
What Constitutes Proper Segmentation?
- The reported result reflects the functions performed by the tested party.
- Revenues and costs attributable to each related-party transaction are clearly separated from those attributable to other transactions.
- The resulting financial outcome is suitable for benchmarking analysis.
Segments must therefore not be overly broad or defined at the aggregated company level.
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Why does segmentation pose a challenge for most companies?
This is primarily because the accounting and controlling systems of most companies are not designed around the logic of related-party transactions, but rather around legal entities, cost centres, or business lines. As a result, it is often very difficult to extract the required data from existing systems.
This is particularly evident on the cost side. Even direct costs are often not fully separated, while indirect costs are allocated on the basis of ex post estimates, making those allocations difficult to reproduce. In many cases, segmentation is driven not by economic reality, but by the availability of data. The new transfer pricing regulation, however, explicitly requires segmentation that reflects economic reality.
Why does incorrect segmentation pose a significant risk when complying with transfer pricing obligations for 2025 transactions?
For the 2025 tax year, taxpayers may opt to apply the new rules to the local transfer pricing documentation. However, the transfer pricing data reporting (ATP) must still be prepared under the previous rules, which may result in two different calculation approaches being applied..
It is possible that the local transfer pricing documentation is already prepared on the basis of a segmented profit and loss statement in accordance with the new regulation, while the ATP forms are still completed using company-level data or a different segmentation approach. Since the NAV bases its risk assessment on the ATP data, differences in the calculation logic applied in the documentation may lead to increased scrutiny and require more extensive explanations.
How are segmentation and benchmark analysis related?
To assess whether segmentation is appropriate, one simple question should be asked: Could there be an independent company in the market carrying out exactly this activity in this form? If the answer is yes, the segmentation is likely appropriate; if not, it should be adjusted accordingly.
An overly broad segment makes it difficult to identify suitable independent comparable companies, whereas an excessively fragmented and narrowly defined segmentation may result in a distorted view of profitability.
Segmentation is therefore a key focus area of the new transfer pricing regulation. Companies should concentrate on developing a clear and stable segmentation approach first and apply the new transfer pricing rules early only once such a framework is in place.
Is it worth applying the new transfer pricing rules for 2025?
