Yet this is precisely where many startups run into trouble. A global entity can appear profitable and commercially sound while still failing every serious transfer pricing examination. The reason is simple but often misunderstood. Transfer pricing is not about where profits end up. It is about why they end up there.
The Gap Between Commercial Logic and Regulatory Logic
Founders often allocate profits based on intuition. The overseas entity sells to customers, so it should earn more. The India entity supports operations, so it earns a service fee. From a business perspective, this feels reasonable.
From a regulatory perspective, this logic is incomplete.
Transfer pricing frameworks assess value creation through functions performed, assets used, and risks assumed. If profits do not align with these elements, the structure becomes vulnerable, regardless of how sensible it feels commercially.
This is why many startups pass internal reviews but fail regulatory scrutiny.
Where Most Structures Break Down
The most common failure point is functional substance.
An overseas entity may book significant revenue, but if strategic decisions, pricing authority, customer negotiations, and risk control remain in India, the profit allocation becomes difficult to defend. Regulators do not look at invoices alone. They examine who actually drives outcomes.
Similarly, founders often underestimate how much risk matters. If the Indian entity absorbs operational risk, hiring risk, and delivery risk, while the overseas entity retains profits without meaningful exposure, the imbalance is visible immediately in a transfer pricing review.
In many cases, documentation exists, but behaviour does not match it.
Transfer Pricing Is Tested Through Behaviour
What regulators and auditors examine is not spreadsheets. They examine patterns.
Who approves discounts and pricing changes
Who signs key customer contracts
Who controls budgets and hiring decisions
Who bears foreign exchange and credit risk
Who can change strategy without approval
If these behaviours sit in one geography while profits accumulate in another, the structure begins to collapse under scrutiny.
This is why transfer pricing disputes often arise even when policies appear compliant on paper. The underlying conduct tells a different story.
Why Early Stage Structures Are the Most Exposed
Startups scaling globally often move faster than their internal frameworks. Sales teams expand abroad. Revenue grows. But governance, documentation, and operational alignment lag behind.
At this stage, profit allocation tends to be reactive. Numbers are adjusted after the fact to achieve target margins rather than designed around how the business actually functions.
By the time audits or investor diligence begin, reversing these decisions becomes expensive and disruptive.
Aligning Profit With Reality
Defensible transfer pricing starts with clarity, not calculation.
The first step is mapping real activity. Where decisions are made. Where value is created. Where risks are actually carried. Only after this mapping can pricing models reflect economic truth.
This does not mean every function must move overseas. It means profits must follow behaviour. When structures are built around substance, documentation becomes a confirmation rather than a justification.
What Founders Should Internalise
Transfer pricing is not a tax optimisation exercise. It is an operating model discipline.
A global entity that looks profitable but lacks functional depth may survive for years without challenge. But once scrutiny begins, the adjustment is rarely small. Penalties, interest, and reputational friction often follow.
Founders who understand this early design global structures that scale cleanly. Those who do not often discover that numbers alone are not enough.
The Strategic Implication
Global growth rewards clarity. Regulators, investors, and banks are aligned on one principle. Profits should sit where value genuinely lives.
When behaviour and economics move together, transfer pricing becomes stable. When they diverge, no spreadsheet can hold the structure together.