Common transfer pricing practices and pitfalls in emerging markets

Global business operations are a reality today. But when your company spans multiple countries, value doesn't just flow freely. It moves through specific transactions: your Indian subsidiary manufactures the product, your Singapore team markets it, and your UAE office provides customer support.

In return for their contributions, these entities are paid in various forms - services, royalties, capital, funding, and increasingly, sophisticated AI systems and databases. All these exchanges require a price, which we call a transfer price.

In the next few minutes, we’ll unpack the mechanics of transfer pricing in emerging markets. No jargon. No legalese. Just what you need to know to stay compliant, stay capital-efficient, and scale with confidence.

Transfer pricing sets the price for transactions between your company’s own entities — subsidiaries, affiliates, or related businesses. It governs the sale of goods, services, intellectual property, and even the use of internal databases across borders.

Why does it matter? Because these internal prices decide where profits are reported, and how much tax you owe in each country. Done right, transfer pricing keeps operations clean. Done wrong, it invites audits, penalties, and double taxation.

To understand this better, say an Indian company manufactures a product for $100 and sells it to its Singapore affiliate for $105. The affiliate then sells it in the US for $200.

• Cost of production (India): $100
• Transfer price to Singapore: $105
• Final sale in US: $200
• Profit in Singapore: $95 ($200 - $105)
• Profit in India: $5 ($105 - $100)

Now, consider that most of the value creation, raw materials, labour, and manufacturing happened in India. Yet only $5 in profit is reported there. Meanwhile, $95 is booked in Singapore, where corporate taxes are much lower.

Tax authorities see this as profit shifting, and may argue that the Indian unit should’ve charged $150, not $105. That would shift $45 more profit back to India, increasing its taxable income and reducing Singapore’s.

To prevent such unfair practices, the arm's-length principle is enforced as the global standard. The rule is simple: prices between your parent company and subsidiaries must match what independent businesses would charge each other in the open market. This principle serves as a barrier against profit shifting between countries and prevents companies from artificially under- or over-charging their own entities. Failing to apply market-based pricing invites tax investigations and substantial penalties that impact your bottom line.

1. Inconsistent local rules and documentation complexity

Transfer pricing compliance in emerging markets is far from simple. It's a complex labyrinth of documentation requirements, changing rules, and local interpretation that deviates all too frequently from international standards.

Most of these nations embrace OECD guidelines in principle, but on the ground level, the method of application could be vastly different. Consider the case of India: even as low as intercompany transactions worth ₹10 million need to be documented in fine detail. This degree of questioning can be cost-prohibitive and hard to handle for startups and small-sized businesses.

To add to the complexity, few emerging economies have well-defined local transfer pricing regulations. Firms are left to improvise using the OECD playbook, which fails to capture the local economic or regulatory environment. The consequence? High risk of non-compliance, controversy, and high penalties, even if firms are attempting to comply.

2. Distorting capital controls

Emerging markets tend to have strict currency exchange controls, which introduce yet another level of complexity to transfer pricing planning for multinational corporations. Such controls can lead to delays in transactions or even bar companies from making payments as intended.

Consequently, intercompany pricing is not merely a compliance issue, it becomes an operational issue. Firms have to create price structures that not only factor in tax rules but also foresee currency bottlenecks, liquidity challenges, and probable changes in central bank policies.

3. Heightened scrutiny of multinationals

While governments of emerging markets are stepping up efforts to plug tax loopholes, their targets are becoming increasingly big MNCs. This is prompted by the necessity to maximise the collection of revenues and ensure that multinationals pay a reasonable amount of taxes. Without precise and well-documented transfer pricing policies, MNCs stand to be more penalised, double-taxed, and subjected to long audit periods.

→ For example, when Starbucks was hit with a €30 million tax bill by EU tax authorities, it pointed to the massive expenses that can be incurred by weak documentation or unclear transfer pricing arrangements.

4. Lack of reliable benchmarking data

Emerging markets often lack reliable data on comparable companies or transactions, making transfer pricing compliance far more challenging than in developed economies. This gap is even wider in specialised sectors like technology and fintech, where benchmarks are scarce.

Even when data exists, it’s often inconsistent due to market inefficiencies, weak reporting standards, or a small pool of players. Without solid comparables, companies face greater difficulty proving their pricing meets the arm’s length principle, exposing them to higher risks of audits, penalties, and non-compliance.

5. Ever-changing regulations that undermine strategy

Emerging markets, especially those with volatile political climates or changing economic priorities, tend to experience frequent tax policy changes. This volatility can lead to surprise tax liabilities, penalties, and the necessity for quick adjustments in transfer pricing tactics. Businesses need to remain nimble to adapt to these changing regulations, or they will become out of compliance and pay dearly for it.

1. Delayed settlements due to compliance verifications

Cross-border payments usually take a long time because emerging markets have complicated compliance rules. Every transaction goes through extensive checks to verify that it complies with transfer pricing regulations, correct documentation, and local laws. The stringent checks result in huge processing queues, further making international transactions cumbersome.

1. Rejected payments due to insufficient documentation 

Payments tend to be declined when supporting documents are not shown to be compliant with transfer pricing requirements. Most rejection reasons involve inconsistencies between invoice descriptions and pre-approved service agreements, failure to properly reflect transfer pricing methods in the payment documentation, or lack of proper proof of service delivery. Each rejection initiates a new approval cycle, causing payment processes to stretch over months, further delaying cross-border transactions.

1. Misapplied FX conversions skew allocations

The extended period between payment initiation and settlement leaves companies vulnerable to large foreign exchange (FX) risk. When transfer pricing agreements call for specific rates or values, but settlements take place at other rates because of processing delays, companies face reconciliation complexities. The difference between the intended and actual currency conversions can skew intercompany balances, resulting in artificial gains or losses that make financial reporting difficult and affect the validity of financial statements.

1. Increased audit exposure and documentation burden

Cross-border payments are now subjected to greater scrutiny, with regulators looking not only at the payment but also the overall transfer pricing framework behind the payment. Every payment leaves behind an audit trail that has to be consistent with the company's set transfer pricing policies. The additional layer of control ensures compliance but also prolongs payment cycles and adds to the administrative load on companies.

1. Cash flow uncertainty affects financial planning

The volatile timing of cross-border settlement poses severe cash management issues. Treasury teams tend to find it difficult to predict when the funds will really clear, with the delay in terms of weeks instead of days. This unpredictability compels companies to maintain excess liquidity within local entities, resulting in suboptimal capital deployment. Consequently, businesses lose opportunity costs by maintaining funds in lower-yielding currencies, which has a direct impact on their overall financial performance.

Experiencing any of the above?

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1. Align finance and tax teams early

Form cross-functional teams that include finance and tax functions, complemented by formal governance frameworks and common performance indicators. Adopt joint planning processes that proactively align transfer pricing factors into operational decision-making, not responding to problems as they develop. 

1. Automate documentation processes

Utilise specialised software that automatically produces compliant supporting materials based on transaction data, sending them through the required approval workflow. Install version-controlled document management systems to keep clear audit trails, minimise error rates, and reduce preparation timeframes, promoting efficient and accurate transfer pricing documentation.

1. Use digital platforms for recordkeeping and compliance

Take advantage of combined solutions that streamline documentation, validation, and submission processes, with real-time transparency into payment status across borders. With Xflow, this involves being able to track and maintain compliance documentation quickly and easily, so everything remains up to date and available as needed. Workflows are made easier, administrative tasks are minimised, and all regulatory needs are fulfilled throughout regions, thus making cross-border payments more streamlined and less susceptible to error.

1. Build flexibility into your payment strategy

Establish multiple payment channels and banking relationships in every jurisdiction to provide contingency options whenever main channels face regulatory obstacles. Establish flexible payment timing structures with buffers to accommodate processing uncertainties without impacting core business operations.

As Matthew Wall, CPA, CA, CBV, recommends, "Companies need to experiment with various prices and know at what price point consumers will cease purchasing their products. Ask yourself, how much of this tariff will add to the cost of the product? And how much of that added cost can be transferred to the consumer?" Likewise, companies should consider how outside influences, such as transfer pricing and delayed payments, may impact their pricing and customer base.

1. Conduct regular compliance reviews

Track payment rejections to pinpoint recurring issues and fix process gaps at the source. Bring in external experts periodically to benchmark your compliance setup against global best practices and shifting regulations. Staying ahead of the curve reduces rejections, safeguards compliance, and keeps operations running smoothly.

Streamlining the intricacies of cross-border transactions requires more than merely moving money; it requires a solution that streamlines, ensures compliance, and reduces friction at every level.

Xflow takes on this challenge with a robust, seamless solution that integrates multi-currency capabilities, automated FX handling, and an iron-clad compliance framework. With its open payment flows and real-time audit-ready documentation, we guarantee every transaction meets global regulatory requirements. The platform is designed to enable companies to navigate and manage complicated cross-border operations, offering regional experience and payment infrastructure that is engineered to comply with local transfer pricing and tax regulations.

At Xflow, we don’t just help businesses accelerate payments — we build trust and control into every transaction. By consolidating payment, compliance, and documentation workflows into one seamless platform, we eliminate friction, reduce risk, and free teams to focus on what matters most: driving growth without the constant burden of delays or compliance hurdles.

In today’s global economy, getting transfer pricing right isn’t optional, it’s a strategic necessity. For companies navigating emerging markets, the stakes are even higher: shifting tax policies, volatile currencies, and rising regulatory oversight all demand precision. Outdated, manual approaches invite audits, penalties, and unnecessary friction. The path forward lies in embracing tools and strategies that simplify compliance, streamline operations, and protect the bottom line, so you can lead with clarity and confidence.