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Borys Ulanenko
CEO at ArmsLength AI
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Transfer pricing functional interviews are in-depth discussions with key personnel to gather facts about functions performed, assets used, and risks assumed by different entities in a multinational enterprise. Their purpose is to "tell the story" of how and where value is created within the group. In transfer pricing, profits must align with each entity's contributions – an entity performing more important functions or bearing more risk should earn a greater share of profit.
Functional interviews help ensure compliance with the OECD Transfer Pricing Guidelines by capturing the actual conduct of the business (not just what contracts say). They provide the factual backbone for the functional analysis (FAR) section of transfer pricing documentation, which is required in both Master File and Local File reports.
These interviews allow consultants to "disentangle who does what, where, with what resources, and at what risk," thereby supporting arm's length transfer pricing outcomes.
According to OECD guidelines, analyzing functions, assets, and risks is core to applying the arm's length principle. Documentation rules now explicitly demand that multinationals demonstrate how profits align with value creation (an emphasis introduced by the BEPS project).
A robust functional analysis – informed by interviews – is often the determinative factor in showing that intercompany prices are arm's length. Tax authorities (and internal auditors) scrutinize whether the transfer pricing reflects the business's substance.
Functional interviews serve to verify that the actual conduct of each entity (who actually performs and controls each activity) matches the transfer pricing characterization. Without this step, there's a risk of basing your analysis on assumptions or contractual fictions that regulators will challenge.
The first preparation step is to determine whom to interview. Transfer pricing touches many parts of a business, so you'll need to engage stakeholders across departments and possibly across different entities in the group.
Identify individuals who have deep knowledge of each major function or value-creating activity, such as:
It's important to include all economically significant activities. For each relevant entity under analysis, list the people who can speak to what that entity does in the value chain. Ensure representation from both sides of any controlled transaction (for example, if analyzing a sale from Company A to affiliate Company B, plan to speak to people at both Company A and Company B).
Before conducting interviews, thoroughly research the business. Collect and review background information such as:
This provides context on the company's value chain and operations. Understanding the broad business model and industry conditions will help you tailor your questions and recognize key economic drivers.
The OECD guidelines and best practices recommend focusing on economically significant activities – knowing the industry and the company's strategy helps pinpoint which functions or assets matter most.
Being well-prepared enables you to ask informed questions and gain credibility with interviewees.
It's useful to frame the purpose of the interviews when communicating with stakeholders. Explain that this is part of an OECD-aligned transfer pricing analysis, which requires understanding "who does what" in the business.
Emphasize that actual conduct will be documented to ensure compliance with the arm's length principle. You might mention that OECD Transfer Pricing Guidelines call for a functional analysis in the Master File and a detailed one in each Local File.
The interviews are not an audit or interrogation, but a collaborative fact-gathering exercise to make sure the company's transfer pricing reflects its true value creation.
Once stakeholders are identified and background research is done, schedule the interviews in a logical sequence. Coordinate with a sponsor from within the company (e.g., the tax director or CFO who is championing the TP project) to introduce the initiative and help secure participation.
Send calendar invites well in advance, and include a pre-read or brief agenda if possible. Aim to schedule about 60-90 minutes per interview, depending on complexity, and let them know you'll follow up with notes or additional questions if needed.
Conducting a functional interview requires a structured yet flexible approach. Below is a step-by-step methodology to ensure consistency and completeness:
Collect and Review Background Information: Before the interview, gather all relevant documentation and facts. Review the company's business model, organizational chart, financials, and any existing descriptions of functions or intercompany dealings.
Identify the Interviewees: Confirm the list of stakeholders to be interviewed across finance, operations, R&D, etc. Make sure each person's role correlates with areas of the value chain you need to cover.
Schedule Interviews and Send Pre-reads: Coordinate timing and invitations. Provide each interviewee with a clear explanation of the interview's purpose.
Prepare a Detailed Questionnaire: Before each interview, customize a list of questions or a checklist tailored to that person's function. Prioritize questions that address key value drivers in that area. You can use our Functional Interview Questions Generator to create tailored questionnaires.
Conduct the Interview:
Documentation and Follow-Up: Immediately after the interview, write up your notes while details are fresh. Document the findings in a structured format. Highlight any points of uncertainty or potential inconsistency that may require follow-up.
A key outcome of functional interviews is a clear understanding of the company's value chain and the economic drivers of profit. The value chain refers to the full sequence of activities by which a company adds value – from product development, procurement of materials, manufacturing, and logistics, to marketing, sales, and after-sales service.
By piecing together insights from all interviewees, a consultant can map out this chain and identify who in the multinational group contributes what at each link. During interviews, encourage stakeholders to describe the end-to-end process of how the company's products or services reach the market.
Understanding the value chain is important because the OECD now expects a holistic view of value creation in transfer pricing analysis. In fact, BEPS Action 13 (transfer pricing documentation) requires a description of the MNE's global value chain in the Master File.
When mapping the value chain, pay attention to key economic drivers at each stage. These are the factors that materially affect profits. Examples include: proprietary technology driving manufacturing efficiency, brand strength driving sales volume, or supplier terms affecting cost of goods.
One of the most challenging – and important – parts of modern transfer pricing interviews is gathering information on intangibles and the DEMPE functions: Development, Enhancement, Maintenance, Protection, and Exploitation of those intangibles.
The OECD Guidelines (post-BEPS) put heavy emphasis on analyzing who performs and controls these DEMPE functions for any valuable intangible assets, because those are the entities entitled to the returns from the intangible.
Understand the Intangible Assets First: Start by identifying what the key intangibles of the business are. These could be patents, trademarks, technical know-how, software, proprietary algorithms, customer lists, brands, etc.
Once you have a catalog of key intangibles, for each one, walk through the DEMPE functions:
Development: Who was involved in the development of the intangible? This typically means R&D or product development teams.
Enhancement: Intangibles are rarely static; they evolve. Ask who improves or refines the technology or brand after its initial development.
Maintenance: This covers routine but essential upkeep – e.g., maintaining a technology (bug fixes, regular updates) or managing a brand's presence (consistent quality control, brand guidelines enforcement).
Protection: This relates to legal protection (patents, trademarks, copyrights) and safeguarding the intangible from infringement or loss. Typically, this involves the legal or IP department.
Exploitation: This is about using the intangible to generate income – e.g., manufacturing and selling products using a patented process, licensing out the IP, or otherwise commercializing it.
People you interview might not be familiar with the term DEMPE, so frame your questions in plain language around their work. Use scenario questions:
Don't neglect funding and risk control. While DEMPE focuses on activities, the OECD also emphasizes that the entity that funds development and controls the financial risk should earn an appropriate return.
Functional interviews are also a prime opportunity to inventory and understand the company's intercompany transactions and how prices are set for those transactions. A thorough transfer pricing study must identify all controlled transactions – tangible goods, services, royalties, loans, etc. – and ensure they have arm's length pricing.
Early in the process, compile a list of intercompany transactions from documentation. Then, during interviews, confirm and expand on this list. Ask each functional head if their department buys from or sells to any affiliate companies.
Some intercompany transactions might not be obvious from financial statements – for example, the exchange of use of an asset or a shared service arrangement that is booked via allocations.
For each significant intercompany transaction, gather information on how the price is determined. Many businesspeople might not know the technical transfer pricing method (that's often set by tax/finance), but they can describe the process.
Sample questions:
Determine who within the organization is responsible for setting or approving intercompany prices. The interviews might reveal a centralized pricing policy or a decentralized one.
After conducting functional interviews, the consultant's job is to synthesize the findings and document the functional analysis thoroughly. Good documentation will clearly outline each relevant entity's functions performed, assets employed, and risks assumed (FAR), as well as the nature of intercompany transactions and the roles of each party.
It's common to document the functional analysis in a narrative form, often organized by entity or by transaction. For each entity (or each party to a transaction), describe:
Functions: Summarize the key functions that entity performs in the business model. Focus on significant functions that materially contribute to value or require unique capabilities.
Assets: Document the assets each entity uses or provides. Separate tangible assets and intangible assets.
Risks: Outline the risks borne by each entity. This should align with your earlier findings on who makes decisions and who bears outcomes of uncertainty.
Ensure that for intangible-related functions, you explicitly incorporate the findings on DEMPE. If there's a section on intangibles, clearly assign who does each of the DEMPE functions for each major intangible.
Include any external or internal context that affects the FAR analysis. For example: "Given the highly regulated environment in Country X, the local entity's compliance function is significant."
While the core approach to functional interviews is consistent across industries, each industry has unique characteristics that influence which functions and risks matter most.
Start by identifying what typically drives value and profit in the client's industry:
Weave in short examples or case studies that emerged from interviews. These make the document tangible:
Example (Pharma): "Company X's R&D centre in Country A undertook the development of Compound Y. Despite three years of work and $50m investment, the project failed in Phase III trials and was abandoned. This cost was absorbed by the R&D centre, underscoring that it bears substantial development risk."
Example (Distribution): "LocalCo launched a marketing campaign featuring a celebrity endorsement without prior HQ direction, investing $2m. The campaign significantly boosted local sales by 20%, reflecting LocalCo's active role in enhancing and exploiting the brand in its market."
During functional interviews, consultants often encounter sensitive topics or hesitant interviewees. Knowing how to navigate these situations matters for getting truthful, complete information without damaging trust.
Goal: Understand how sales are made, local vs central responsibilities in sales and marketing, customer base, and related risks.
Key Questions:
Goal: Document the development of new products/technologies, how R&D is structured, and intangible creation.
Key Questions:
Goal: Clarify legal ownership of IP, how IP is protected and licensed, and identify intangible assets and related intercompany flows.
Key Questions:
Goal: Understand creation and management of marketing intangibles (brand, customer base), advertising activities, and their funding.
Key Questions:
Goal: Understand how inputs are sourced, whether purchasing is local or centralized, and related logistics and inventory management.
Key Questions:
Goal: Capture production process, assets used, decision-making hierarchy, and operational risks.
Key Questions:
Goal: Cover support activities like finance, HR, IT, and any central services, plus intercompany loans and overall governance.
Key Questions:
Transfer pricing functional interviews are an essential exercise for consultants to gather the substance behind intercompany dealings. By carefully preparing, engaging the right stakeholders, and asking detailed questions across all relevant functions, you can map out the entire value chain and each entity's role within it.
A well-conducted series of functional interviews results in a robust functional analysis that stands up to scrutiny. It will clearly show who in the multinational group performs and controls each significant function, who provides and owns the key assets (tangible and intangible), and who assumes each risk, as well as how these align with the company's transfer pricing policies.
For consultants, mastering functional interviews means you can uncover practical insights and "red flags" early and address them in your analysis and recommendations. For the company, this process often has the side benefit of educating their teams on transfer pricing and highlighting internal inconsistencies or areas for better alignment.
By following the structured yet flexible approach detailed in this guide, both new and experienced consultants can conduct functional interviews effectively across industries. The end result will be a well-supported transfer pricing report that meets compliance requirements and reflects the business's operating reality – the best defense for any transfer pricing position.
Functional interviews usually take 60-90 minutes per session, depending on the complexity of the function being discussed and the interviewee's role. For key functions like R&D in a technology company or manufacturing in a production-heavy business, you might need longer sessions or multiple interviews.
For a mid-sized multinational with 5-10 entities, you would typically interview 8-15 people across different functions. The exact number depends on the complexity of the business model, the number of significant intercompany transactions, and how centralized or decentralized the organization is.
This happens frequently! When two interviewees provide contradictory information, follow up tactfully with clarifying questions to both parties. Often, the contradiction stems from different perspectives or incomplete information rather than deliberate misrepresentation. Document both viewpoints and try to reconcile them through additional inquiry or by checking supporting documentation.
Generally, recording interviews is not recommended as it can make interviewees uncomfortable and less forthcoming. Instead, take detailed notes during the interview and write them up immediately afterward. If you do need to record, always get explicit permission and explain the purpose and confidentiality measures.
For transfer pricing documentation purposes, functional interviews should be refreshed whenever there are significant changes to the business model, reorganizations, new intercompany transactions, or shifts in how functions are allocated between entities. Even without major changes, it's good practice to conduct refresh interviews every 2-3 years to capture gradual operational evolution.
Yes, functional interviews can be conducted via video conferencing when in-person meetings aren't possible. Remote interviews can be effective, but may require more preparation and careful management to build rapport and capture nuances. Consider sending questions in advance and using screen sharing for any visual aids or documents that need to be discussed.
Many business people aren't familiar with transfer pricing terminology. Frame your questions in business terms rather than tax jargon. Instead of asking about "transfer pricing policy," ask "How do you determine the price when selling to your affiliated company in Country X?" Focus on their day-to-day activities and decisions rather than the tax implications.
The OECD Transfer Pricing Guidelines provide the framework for functional analysis: