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      As the financial year draws to a close, tax and finance teams focus on the key tasks required to finalize year-end results.

      Among the recurring transfer pricing considerations are year-end adjustments, which help ensure that actual financial outcomes align with established transfer pricing policies and intercompany agreements.

      Although these adjustments are widely used and relatively straightforward to implement, they should not be approached too casually. Tax professionals must remain mindful of potential side effects and compliance implications associated with such adjustments.

      Portrait of Andreas Wiesner
      Andreas Wiesner

      Director, Global Transfer Pricing Services

      KPMG Switzerland

      Why are year-end adjustments used?

      Transfer pricing year-end adjustments are designed to align the actual profitability of related-party transactions or entity profit levels with the arm’s length range determined in benchmark analyses. They help correct forecasting errors, volume or market deviations and other operational variances that arise during the year, while keeping the underlying transfer pricing policy conceptually unchanged.

      By proactively bringing results back to an arm’s length outcome, year-end adjustments can reduce the risk of primary adjustments and double taxation in later audits. At the same time, they can be a critical element in managing global tax costs and positively contribute to a group’s effective tax rate. 

      Challenges and risks

      Year-end adjustments are simple to execute and remain a popular instrument for many Swiss and international headquarters. While convenient, their use comes with certain challenges and risks that must be carefully managed.
       

      Adjustments to the detriment of a foreign company

      An LRD making a payment to its Swiss headquarter company to bring its profitability down to a certain benchmarking range, the adjustments are often heavily scrutinized by local tax authorities.

      Tax authorities may challenge whether such payments reflect third-party behavior, even if the resulting profitability aligns with third party benchmarks. It is generally recommended to avoid these types of year-end adjustments.

      If such an adjustment is executed, companies should verify that intercompany agreements permit true-down payments and ensure the specific case is properly documented. 

      Adjustments for the benefit of the receiving company

      A Swiss headquarter company making a true-up payment to a foreign limited risk distributor (LRD) to achieve its target margin may not face challenges from foreign tax authorities; however, such adjustments can still be questioned from a Swiss tax perspective.

      This is particularly the case when the LRD’s loss position is not caused by transfer prices but rather by local mismanagement. 

      How to manage or avoid year-end adjustments

      To prevent challenges from tax and customs authorities, year-end adjustments should be avoided or at least minimized. The basis for this is a clear process that monitors actual transfer pricing results and enables companies to implement prospective transfer pricing adjustments during the year rather than at year-end.

      Analytics tool can help monitor transfer prices on an ongoing basis and support timely corrective actions. However, the most important step is to investigate the reasons for deviations from TP policies and the need for year-end adjustments. There can be various reasons why companies cannot avoid year-end adjustments. Common reasons include data limitations, lack of resources and unclear responsibilities.

      However, many challenges can be addressed through a step-by-step approach for continuous and incremental improvements. Start by analyzing why year-end adjustments are necessary – KPMG can assist in finding the right solutions. Even small changes can lead to significant improvements.

      Practical tips for effective year-end adjustments

      In both directions, companies should carefully review the economic circumstances for each group entity and make informed decisions on the basis and extent of any year-end adjustments:

      • Operating Margin Adjustments

        Performing year-end adjustments to bring the operating margin into a TNMM interquartile benchmarking range is a common approach. The adjustment may affect COGS, intercompany charges or OPEX components. However, this method can lack nuance and is often considered the “year-end bazooka”.

      • Gross Margin Adjustments

        Adjustments targeting the gross margin might be more pronounced and focus on the appropriateness of transfer prices related to COGS. This approach allows for more targeted adjustments, particularly when below-gross-margin P&L items are fully managed by the local entity and it is not appropriate to fully absorb local losses.

      • Other adjustments

        In certain cases, year-end adjustments may address specific items, such as reimbursing (or absorbing) foreign exchange losses (or gains) that caused results to fall outside of the benchmark range.

      Impact of global tax developments

      In any case, year-end adjustments should always be handled with care. This includes reviewing intercompany agreements to confirm whether the contractual clauses permit such adjustments. If permitted, companies should clearly document the rationale for the adjustment and the method used to determine the amount.

      This is especially important as the classification of the year-end adjustment can affect other taxes such as VAT, withholding taxes or custom duties.

      A recent decision by the Court of Justice of the European Union (CJEU) (case C-726/23, September 2025) held that inter-company transfer pricing payments based on the transactional net margin method (TNMM) provided for in the OECD Transfer Pricing Guidelines are subject to VAT. This decision underscores the need for a holistic and thoughtful approach when executing year-end adjustments.

      Checklist for year-end adjustment planning

      Use this high-level checklist to guide your planning before year-end:

      • Review intercompany agreements
      • Analyze financial YTD performance and expected year-end outcomes against your TP policy
      • Identify data gaps and root causes
      • Determine year-end approach and calculate adjustment amount
      • Prepare documentation for potential adjustments
      • Coordinate with customs and indirect tax teams

      How KPMG can support you

      KPMG’s transfer pricing specialists assist companies in identifying the drivers behind year-end adjustments, assessing alignment with intercompany agreements and establishing effective monitoring processes.

      We help clients design practical, sustainable solutions to minimize last-minute adjustments and ensure that any required corrections are well-documented and compliant with Swiss and international tax requirements.

      Discover our Transfer Pricing Services

      Meet our expert

      Portrait of Andreas Wiesner
      Andreas Wiesner

      Director, Global Transfer Pricing Services

      KPMG Switzerland