Methods & benchmarking
Working Capital Adjustment
A working capital adjustment corrects for differences in receivables, payables and inventory levels between a tested party and its comparable companies, since these differences carry an implicit interest cost or benefit not reflected in operating margins. By applying an imputed interest rate to the working capital gap, the.
Working capital adjustments recognise that a company financing higher receivables or inventory effectively extends more credit to customers or suppliers, incurring a financing cost that reduces its true economic return even if reported operating margins look similar to peers. The adjustment calculates the net working capital.
Selecting the interest rate used in a working capital adjustment requires care, since it should reflect a rate available to the tested party or comparables in their respective markets, often a short term borrowing or deposit rate. While the adjustment is widely accepted under the transactional net margin method, tax authorities.
In practice
What matters when applying working capital adjustment
- Neutralises differences in receivables, payables and inventory
- Reflects the implicit financing cost of working capital
- Commonly paired with the transactional net margin method
- Requires selecting an appropriate imputed interest rate
- Not accepted in every jurisdiction, so local rules matter
Frequently asked
Common questions
Why does working capital affect comparability in transfer pricing?+
Working capital levels affect how much financing cost a company effectively bears to run its operations, since higher receivables or inventory tie up cash that could otherwise earn a return, while higher payables provide free financing from suppliers.
What interest rate should be used in a working capital adjustment?+
There is no single mandated rate, but practitioners typically use a short term borrowing or deposit rate relevant to the currency and market of the tested party or comparables, such as a local interbank rate. The chosen rate should be defensible and consistently applied across the data set.
See how the tooling handles this in practice
Our transfer pricing tools calculate intercompany charges, benchmark financing and reconcile the intercompany ledger from your own data. Book a short walkthrough and we will show the workflow on a scenario that matches your group structure, rather than a generic demo dataset.