Transfer pricing has long been a key area of focus for pharmaceutical companies, but an increasingly demanding regulatory environment is creating new compliance challenges.
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Unique transfer pricing challenges in the pharmaceutical industry
Determining
arm’s-length pricing for transactions between related parties is particularly
complex in this sector due to research and development activities, intellectual
property and licensing arrangements, manufacturing and contract
manufacturing models, as well as international distribution structures.
Transfer Pricing Gets More Complex: New Segmentation Requirements
One of the
most significant changes under the transfer pricing rules that become mandatory
from 2026 is the tightening of segmentation requirements. Companies will be
expected to track revenues, costs, and profits attributable to individual
related-party transactions with a level of detail sufficient to support
comparability analyses and transfer pricing positions.
For
pharmaceutical businesses, this can be especially challenging. A single entity
often performs multiple functions simultaneously, such as sales and marketing
activities, clinical or R&D services, manufacturing and packaging
operations, the distribution of licensed products, or acting as a regional
shared service center. Because these activities involve different functions,
risks, and expected returns, they cannot automatically be treated as a single
profit pool for transfer pricing purposes. The new regulations clearly move
toward a transaction-level or activity-level approach.
Benchmarking Difficulties in the Pharmaceutical Sector
An additional
challenge arises from the global nature of the pharmaceutical industry.
Multinational groups frequently carry out similar transactions across several
jurisdictions, while significant differences may exist in product portfolios,
business models, functional profiles, competitive environments, and economic
conditions. These factors must be considered when establishing transfer prices
and assessing comparability, and appropriate adjustments may be required where
necessary.
The Transfer Pricing Team at LeitnerLeitner can serve as a trusted partner in this area. Our professionals have extensive experience in both transfer pricing advisory projects and tax authority audits across multiple jurisdictions. Rather than producing transfer pricing documentation as a routine exercise, we take a holistic approach, reviewing clients’ overall transfer pricing framework and highlighting the broader accounting, tax, and business implications that may arise.
Segmentation, Benchmarking, and Documentation: Three Components of One Transfer Pricing Process
In practice,
many companies still focus primarily on business operations throughout the year
and address transfer pricing compliance only during the year-end closing
process. However, this approach is becoming increasingly risky. The key
components of a transfer pricing framework are closely interconnected: pricing
policies, segmented financial tracking, benchmarking analyses, and transfer
pricing documentation all form part of the same process.
If these
tasks are postponed until the end of the financial year, companies often
discover too late that the necessary information is not available at the
required level of detail, that cost allocations rely on retrospective
estimates, or that existing systems cannot reliably separate the results of
individual transactions. Such shortcomings can become particularly problematic
during a tax audit.
The Way Forward: Embedding Transfer Pricing into Daily Operations
The most
effective approach is to integrate transfer pricing into day-to-day business
processes rather than treating it as a standalone compliance exercise.
Related-party pricing should ideally be established at the outset of
transactions and supported by appropriate benchmarking analyses. Likewise,
segmentation principles should be built into accounting and controlling
processes, while cost allocation methodologies should be properly documented
and consistently applied.
Under such a
framework, transfer pricing documentation becomes the natural outcome of a
well-designed process rather than a year-end fire drill. This not only reduces
compliance risks but also improves the quality of documentation, the
reliability of benchmarking analyses, and the consistency of reporting provided
to tax authorities.
Given the
complexity of pharmaceutical business models and multinational corporate
structures, transfer pricing compliance requires considerable expertise. For
this reason, many companies may benefit from engaging experienced advisors to
support part or all of their transfer pricing obligations.
