Everything You Need to Know About Transfer Pricing for Global Compliance

Transfer pricing is one of the most important compliance areas for startups with group entities in multiple countries. It governs how you price services, goods, intellectual property, or loans between your own entities.

If this pricing isn’t documented properly or doesn’t follow accepted international standards, your startup could face double taxation, audit scrutiny, and delays in moving funds across borders. This is especially relevant when working between jurisdictions like the US and India.

This guide helps you understand how transfer pricing works, which methods apply to early-stage companies, and how to build a compliant, cost-effective framework from day one.

What is Transfer Pricing? Why Does It Matter for Startups?

Transfer pricing refers to the pricing of transactions between related legal entities under common control. 

These transactions can include services, licensing of intellectual property, transfer of goods, or intercompany loans. For example, if your Indian subsidiary provides software development or support services to your US parent company, the fees charged for those services must follow specific pricing guidelines.

It matters because tax authorities in each country want to ensure that income is appropriately taxed in their jurisdiction. If your pricing isn't aligned with the “arm’s length principle”, meaning prices that unrelated parties would agree to, your startup could be exposed to audits, penalties, and even double taxation. 

Transfer pricing compliance also becomes a red flag for investors and due diligence teams if ignored or handled informally.

What are the Key Transfer Pricing Methods?

Startups need to adopt pricing methods that are accepted by tax authorities, especially those aligned with OECD guidelines and local regulations in countries like India and the US The method you choose depends on the type of transaction, availability of comparable data, and operational complexity.

Most early-stage startups with Indian service arms use cost-plus methods, while others may rely on resale-based or profit-split approaches for distribution or IP-heavy setups. Below is a comparison of commonly used methods and when each one fits best.

What Transfer Pricing Challenges Do Startups Face?

Transfer pricing requires active planning, ongoing documentation, and alignment with evolving global tax norms. For early-stage startups, these demands often clash with limited capacity, informal processes, and lean finance teams.

As startups scale, even simple intercompany arrangements like India-based service centers billing US headquarters can invite scrutiny from tax authorities. 

Without proper documentation or comparables, your business may face delayed payments, tax disputes, and compliance penalties including challenges like:-

• Startups often lack the internal capacity to manage detailed documentation. Preparing intercompany agreements, benchmarking studies, and compliance files requires time and expertise most early-stage teams don’t have.
• Finding appropriate comparables is particularly hard for IP-heavy or tech-driven services. Unlike commodity trades, software development, R&D, or design services don’t have readily available market pricing.
• Cross-border billing adds exposure to foreign exchange risks and delays. Payment lags, unfavorable conversion rates, and repatriation restrictions can impact cash flow and margins.
• Regulatory expectations evolve quickly across jurisdictions. India, the US, and OECD members frequently update their rules and reporting requirements, requiring startups to constantly adapt.
• Double taxation risks increase when countries disagree on pricing. If one country adjusts your pricing without corresponding relief in the other, you may end up paying tax twice on the same income.
• Startups bear the burden of proving that their pricing is arm’s length. You must demonstrate that your internal pricing resembles what unrelated companies would pay, which is difficult without external benchmarks and clear documentation.

How Should a Startup Set Up a Compliant Transfer Pricing Framework?

Transfer pricing compliance shouldn’t be treated as a post-funding problem. If you’re operating across borders, you need a simple, documented approach from day one.

Here’s a step-by-step process to set up a lean, scalable transfer pricing framework that meets regulatory expectations without draining your time or budget:

Step 1: Draft a policy document

Start by outlining how your group entities work together and how you plan to price those transactions. Clearly describe the nature of services, ownership of IP, or intercompany loans, and the rationale for pricing each one.

Step 2: Benchmark your pricing

Use external databases, government-published studies, or industry benchmarks to support your markup. For example, cost-plus markups for Indian service centers typically range between 8% and 18%. Your documentation should justify where you land within that range.

Step 3: Run a FAR analysis

This stands for Functions, Assets, and Risks. Break down what each entity contributes - who performs the work, who owns the assets or IP, and who bears the financial risks. Your pricing structure should reflect these roles.

Step 4: Sign intercompany agreements

Formalize your arrangements with signed contracts between group entities. Include details like scope of services, pricing method, payment terms, currency, and dispute resolution. This is your first line of defense in any audit.

Step 5: Prepare your documentation files

India follows OECD guidelines, which require two types of files: the Master File (overview of your global group) and the Local File (India-specific details). Even if you’re below the threshold now, getting into the habit of maintaining these documents reduces future scramble.

Step 6: Stay updated on regulation changes

Transfer pricing rules evolve. Subscribe to updates from the Indian Income Tax Department and IRS, and monitor OECD guidance. What’s acceptable today may need updates next year.

Step 7: Consider an APA if needed

If your structure involves significant IP or large service fees, you may want to explore Advance Pricing Agreements. These are formal rulings from tax authorities that approve your pricing methodology in advance reducing audit risk.

How Do Real-World Startup Models Handle Transfer Pricing?

Most early-stage startups with group entities in India and the US use a cost-plus model. 

The Indian company, typically a private limited entity, acts as a service provider, delivering development, marketing, or support services to the US parent. The Indian entity invoices monthly, applying a fixed markup to cover costs and generate a modest margin. While this setup works well for lean teams, it comes with operational and compliance complexities that can’t be ignored.

Let’s understand it with an example. Let’s say, an Indian Pvt Ltd provides backend engineering support to its US-based parent company. It bills the parent at the end of each month, applying a markup of 12% on direct service costs like salaries, rent, and admin. The income is taxed in India, and since services are exported, GST is zero-rated. The US parent remits payment in USD, which is converted in India, often with 2–4% FX loss depending on the bank and timing. Documentation includes intercompany agreements and a Local File for Indian transfer pricing compliance.

Key operational considerations for such setups include:

• Ensuring monthly invoicing and remittance are timely to maintain liquidity for the Indian entity.
• Managing foreign exchange volatility, especially if transfers are large or irregular.
• Filing a Letter of Undertaking (LUT) to claim zero-rated GST on exported services.
• Coordinating with tax professionals who understand both Indian and US reporting rules to avoid mismatches.

How Inkle Helps Startups Manage Transfer Pricing Compliance

Transfer pricing compliance doesn’t have to mean endless paperwork or expensive consultants. Inkle offers a startup-friendly way to stay compliant across India and the US, with tools that streamline documentation, invoicing, and reporting while giving you access to expert support when needed.

With Inkle, you can:

• Generate compliant intercompany invoices with automated markup calculations.
• Track and store transfer pricing documentation to stay audit-ready year-round.
• Benchmark your service pricing using integrated databases and industry data.
• Align your reporting across India and the US with coordinated workflows.
• Reduce FX risk and simplify fund transfers with global banking integrations.

Want help setting up your transfer pricing framework? Book a demo with Inkle to see how we simplify cross-border compliance for startups.

Frequently Asked Questions

What is transfer pricing for a startup?

Transfer pricing refers to how your company prices transactions like services, IP, or loans between its own entities across different countries. For example, if your Indian subsidiary provides support to your US parent, the invoicing between the two must follow transfer pricing rules.

Is transfer pricing required for small startups?

Yes. If your startup operates in more than one country, you’re subject to transfer pricing rules regardless of size, revenue, or funding stage.

What markup should I use for India-based services?

Markups for Indian captive service providers usually range from 8% to 18%, depending on your service type, industry, and benchmarking data.

Do I need to file transfer pricing documentation in India?

Yes. If your Indian entity crosses certain revenue or transaction thresholds, you’re required to maintain and submit a Local File and Master File under Indian transfer pricing rules.

Can I get penalized for incorrect pricing?

Absolutely. If tax authorities find that your intercompany pricing isn't at arm’s length, you could face audits, penalties, interest charges, or even double taxation.

How does Inkle help with transfer pricing?

Inkle simplifies transfer pricing with automated invoicing, document storage, benchmarking tools, and expert workflows tailored for India–US startups.