B4.141 Transfer pricing and tangible goods
Perhaps the most basic element in commerce, a tangible good, has physical properties and is typically a good that will eventually be sold in some form to a third party. In its simplest form, a group involved in the production and sale of tangible goods would be engaged in intra-group flows of products from manufacturers through to sales and marketing entities before delivering the product to third parties.
There are many variants to this very basic model, which could involve the use of invoicing entities (for example, for the management of currency risk) or agents acting as intermediaries in the sale of goods. As is discussed below, the transfer pricing issues surrounding the trade in tangible goods are affected by the functions, risks, and assets of the entities through which the goods flow, see, for example, DSG Retail Ltd1 as described in B4.121. HMRC guidance is at INTM440020.
Manufacturers and transfer pricing
The common function of all types of manufacturer is to apply processes to inputs in order to create a developed product. This is true for the full spectrum of manufacturers from simple contract manufacturing through to complex manufacturing operations bearing full risk exposures. From a transfer pricing perspective, the transfer pricing treatment of transactions in tangible goods depends on the operational model employed by the multinational group in terms of the allocation of functions performed, assets used, and risks borne between the relevant group entities. This can be illustrated by considering the position for
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