Practical OECD Transfer Pricing Guide for Startups: Documentation, Cost-Plus, Loans, IP

Understanding OECD Transfer Pricing Guidelines for Startups

Your startup is gaining traction, with a small team in the UK and a new hire in the US to crack the market. The focus is on product, growth, and runway, not complex international tax compliance for small businesses. Transfer pricing can sound like an expensive, time-consuming distraction reserved for giants like Google. However, establishing a simple, defensible framework for your startup cross-border transactions now is a pragmatic decision. It protects you from future tax risks, avoids messy clean-ups during fundraising, and ensures you are not leaking cash between entities. Getting the basics right is not about hiring an army of consultants; it’s about smart, stage-appropriate financial governance that tax authorities in both the UK and US expect. For practical forms and guidance, see the transfer pricing documentation hub.

What Is Transfer Pricing (and Why Isn't It Just for Google)?

At its core, transfer pricing refers to the rules and methods for pricing transactions between related business entities. If your UK parent company provides management services to your US subsidiary, the price for those services is a transfer price. The entire system is governed by a single, internationally recognized idea: the Arm's Length Principle. This principle, which is the foundation of the OECD Transfer Pricing Guidelines, states that the price between your related entities should be the same as if they were two unrelated companies negotiating in the open market.

Why does this matter for your SaaS or Biotech startup? Tax authorities like the UK’s HMRC and the US’s IRS want to ensure profits are taxed in the country where the value is created. Without clear transfer pricing rules for startups, a company could, for example, have its UK R&D hub charge an artificially low price for its intellectual property to a subsidiary in a low-tax country, shifting profits there. For early-stage companies, the goal is simpler: compliance and risk mitigation. It’s about demonstrating a reasonable, good-faith effort to price intercompany transactions fairly, ensuring your multinational startup tax obligations are met without creating future headaches. For a practical comparison, see our guide on UK vs US Transfer Pricing.

Setting Arm's-Length Prices: Practical Transfer Pricing Rules for Startups

Founders often ask, "How do I set a defensible price for services or IP when there are no public companies that do exactly what we do?" This is a classic startup challenge. The reality for most early-stage startups is more pragmatic: you do not need perfect comparables. You need a logical, documented methodology. The OECD guidelines provide several methods, but a few are particularly well-suited for startups.

For Intercompany Services: The Cost-Plus Method

This is the most common and defensible approach for internal services, like when a parent company provides administrative, technical, or management support to a subsidiary. You simply calculate the total costs incurred to provide the service, including a portion of salaries and overhead, and add a reasonable markup. A key piece of data is that a common and generally accepted markup for routine support services using the Cost-Plus method is between 5% and 10%.

Consider a UK-based SaaS startup with its core engineering team in London and a new US subsidiary with a single sales employee. The UK parent provides all finance, HR, and executive oversight. To price these services, the UK entity would calculate the pro-rata cost of its operations team supporting the US employee and add a markup. If the allocable costs are $50,000, a 7% markup would result in a service fee of $53,500 charged to the US entity. This should be documented with an intercompany agreement and invoiced in your accounting software like QuickBooks or Xero.

For Intercompany Loans: Using Safe Harbors

If your UK parent company lends cash to your US subsidiary to cover initial operating expenses, you must charge interest. A loan with zero interest is not an arm's-length transaction. Fortunately, some jurisdictions provide shortcuts. A safe harbor for intercompany loan interest rates in the US is the IRS published Applicable Federal Rates (AFRs). These are updated monthly and are considered a pre-approved, low-risk rate by the IRS. While the UK does not have an identical safe harbor, using a credible benchmark like the AFR is a very defensible starting point.

For Intellectual Property (IP): Focus on Rationale

Pricing IP is the most complex area of transfer pricing. While large corporations use specialized databases like Compustat and RoyaltyStat for comprehensive benchmarking studies to find comparable royalty rates, this is often overkill for an early-stage company. Initially, the focus should be on documenting the arrangement, such as a cost-sharing agreement for ongoing R&D, rather than a formal royalty. The key is to have a clear business and economic rationale for your approach. For help finding comparables, refer to our guide on Benchmarking Studies for Transfer Pricing.

Related Party Transactions Documentation: A Staged Approach

Producing related party transactions documentation does not have to mean a 200-page report. The expectation from tax authorities is that the complexity of your documentation should match the complexity of your business. This is where a staged approach based on revenue becomes essential for managing your multinational startup tax obligations.

Stage 1: Pre-Seed/Seed (<$5M Revenue) – The Policy Memo

At this early stage, your goal is to create "contemporaneous documentation," which simply means recording your transfer pricing decisions as they are made. A simple one to two-page Policy Memo is generally sufficient. It should outline:

• The entities involved (e.g., UK Parent, US Subsidiary).
• The intercompany transactions occurring (e.g., management services, loan).
• The pricing method chosen for each (e.g., Cost-Plus at 8% for services, AFR for the loan).
• A brief business rationale for the chosen methods.

This simple document demonstrates intent and a good-faith effort to comply.

Stage 2: Series A/Early Series B ($5M - $20M Revenue) – The "Lite" Study

As your revenue and complexity grow, so do the expectations. Here, you should upgrade your memo to a "Lite" transfer pricing study. This is a more formal document, often prepared with an advisor, that expands on the memo. It includes a more detailed functional analysis (describing the roles, responsibilities, and risks of each entity) and includes high-level benchmarking to support your chosen markups or rates. It's a bridge to the formal requirements that come with scale.

Stage 3: Scaling/Late Series B+ ($20M+ Revenue) – The Formal Annual Study

Once you cross the approximate $20M revenue threshold, you enter a new level of scrutiny. At this point, annual formal studies are expected. These reports should align with OECD Local File requirements. A Local File is a standardized report that provides tax authorities with detailed information about the local entity, its management structure, financials, and a comprehensive analysis of all its related-party transactions. This level of documentation often requires specialist support and robust data from your accounting systems. For a scaled approach, see our guide on the Master File and Local File for Small Groups.

Common Transfer Pricing Risks for Early-Stage Companies

Navigating transfer pricing rules for startups involves sidestepping a few common but costly mistakes. Understanding these transfer pricing risks for early-stage companies can save significant time, money, and future diligence headaches.

The 'Delaware Flip' Tax Surprise

Many non-US startups re-incorporate in the US to attract venture capital, a process often called a "Delaware Flip." For example, a UK entity becomes a subsidiary of a new US Delaware C-Corp. This has major tax implications. The migration of Intellectual Property is a taxable event requiring formal valuation. In the eyes of HMRC, the UK entity just "sold" its valuable IP to the new US parent. If the IP is not properly valued at its fair market value at the time of the transaction, the company could face a significant and unexpected tax liability. For best practices, see our guide on Transfer Pricing for IP Royalties.

Having a Policy but No Process

A scenario we repeatedly see is a startup with a perfect policy memo stored in a folder but no corresponding activity in their accounting software. A policy is meaningless to the IRS or HMRC if it is not implemented. You must issue intercompany invoices, record them correctly in QuickBooks or Xero, and have the cash actually move between the entities' bank accounts. Your operational reality must match your documentation.

Using a One-Size-Fits-All Approach

Founders in a hurry may apply a single method to all transactions, for instance, applying a Cost-Plus markup to an intercompany loan or an IP license. This is a red flag for tax authorities because it shows a lack of understanding of the arm's-length principle. Always use the appropriate approach for the transaction type: Cost-Plus for routine services, a market interest rate for loans, and a specific valuation or royalty methodology for valuable IP. Low-risk routines can be treated differently; see guidance on Low-Value Adding Services.

Your Action Plan for Transfer Pricing Compliance

For founders managing finance with limited resources, the path to compliance can be straightforward. The goal is not perfection but a reasonable, documented, and consistently applied approach.

• Under $5M Revenue: Start with a simple, one-page Policy Memo. Document your service transactions using the Cost-Plus method; a markup between 5% and 10% is a widely accepted range. For loans between your US and UK entities, use the IRS published Applicable Federal Rates (AFRs) as a defensible interest rate.
• From $5M to $20M Revenue: Evolve your memo into a more structured "Lite" study. Ensure your chart of accounts in QuickBooks or Xero can cleanly track intercompany revenues and expenses. This prepares you for the next stage of scrutiny.
• If You Have Done an IP Migration (like a 'Delaware Flip'): Do not estimate the value. The migration of Intellectual Property is a taxable event, so obtaining a formal valuation is essential to defend your tax position with authorities.
• Make It Real: The most critical step is to operationalize your policy. Issue the invoices. Transfer the cash. Ensure your accounting records and bank statements tell the same story as your documentation. This simple act of execution is what turns a policy into a defensible position.

For further reading on OECD standards, consult the OECD Transfer Pricing Guidelines and the HMRC and IRS guidance pages linked above. For full templates and checklists, see the transfer pricing documentation hub.