Exchange Rates for Transfer Pricing and Intercompany Invoicing: A Policy That Survives Review

How to set and document the exchange rate policy for intercompany transactions and transfer pricing files, why tax authorities challenge inconsistent rates, and how to source one published table for every entity.

Transfer pricing reviews rarely start with the exchange rate, but the exchange rate is where a review finds an easy adjustment. Two entities booking the same intercompany invoice at different rates create a difference that looks like a pricing error. A rate policy that changes from quarter to quarter looks like profit steering. The defence is boring: one written policy, one published source, applied by every entity, with the table retained.

What the policy has to say

• Source: the publisher and the table. For example the ECB reference rate, or the national central bank of the invoicing entity.
• Timing: which date's rate applies to an intercompany invoice: invoice date, month-end, or a monthly average computed from the published daily series.
• Non-publication days: last published rate before the date, stated explicitly.
• Currencies outside the source: which local central bank table is used where the primary source does not quote the currency, and whether cross rates are derived and how.
• Change control: who can change the policy, and that a change applies prospectively with a note in the transfer pricing file.

The OECD Transfer Pricing Guidelines do not prescribe a rate. They ask for comparability and consistency, and Chapter V's documentation requirements mean the policy above belongs in the master file or local file, with the rate source named. Some jurisdictions go further: entities in countries with published official rates, such as those served by the Reserve Bank of India, the Central Bank of Brazil or the Bank of Russia, are expected to use them for statutory purposes regardless of the group policy, so the policy has to record both conversions.

Operating it across entities

A policy only holds if every entity actually uses the same table. That fails when each subsidiary's ERP has its own market feed. The workable pattern is one group table distributed to all systems:

• The group pulls the published table for each date from one source that covers every entity's currency, which is why coverage of 116 central banks matters more here than anywhere else.
• Each ERP receives that table into the exchange rate type used for intercompany postings. The SAP, Business Central, Odoo, Xero and QuickBooks guides show the mechanics for mixed-system groups.
• Intercompany reconciliation then compares amounts converted at the same rate, and remaining differences are real.
• The table for each period is archived once, centrally, as the evidence for every entity. See audit evidence.

Frequently asked questions

Is there a legally required rate for intercompany invoices?

Not one rate. The arm's length principle asks what independent parties would have agreed, and independent parties agree a rate mechanism in the contract. The requirement in practice is a documented policy, a recognised published source, and consistent application. Local VAT rules still apply to the VAT on the same invoice.

Can we use a monthly average for intercompany recharges?

Yes, if the intercompany agreement says so and the average is computed from a published daily table you can produce. The exposure comes from switching between average and spot when it favours one entity.

What happens when two tax authorities want different rates?

Each entity converts for its own tax return under its own rules, which can differ from the contractual rate. Record both the contractual conversion and the local statutory conversion. Differences are foreign exchange results, not pricing adjustments.

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