How can you develop a transfer pricing documentation policy that aligns with your financial goals?

1 Assess your risks and opportunities

The first step is to identify the potential risks and opportunities of your transfer pricing practices. Risks include tax audits, adjustments, double taxation, interest charges, and penalties. Opportunities include tax optimization, profit allocation, and competitive advantage. You need to understand the tax rules and requirements of each jurisdiction where you operate, as well as the economic substance and value creation of your transactions. You also need to evaluate the impact of external factors, such as market conditions, exchange rates, and regulatory changes, on your transfer pricing arrangements.

2 Define your objectives and strategy

The next step is to define your objectives and strategy for your transfer pricing documentation policy. Your objectives should reflect your financial goals, such as maximizing profitability, minimizing tax liability, or enhancing cash flow. Your strategy should outline how you will achieve your objectives, such as using a certain transfer pricing method, applying a specific profit level indicator, or setting a target margin. You should also consider how your strategy aligns with your business model, value chain, and corporate governance.

4 Prepare your documentation content

The fourth step is to prepare your documentation content, which is the information and analysis that support your transfer pricing policies and practices. Your documentation content should demonstrate that your transfer prices are arm's length, meaning that they are comparable to what independent parties would charge in similar circumstances. Your documentation content should also provide evidence of the functions performed, assets employed, and risks assumed by each entity involved in the transactions. Your documentation content may include a functional analysis, a comparability analysis, a transfer pricing method selection, and a financial analysis.

5 Review and update your documentation regularly

The fifth step is to review and update your documentation regularly, to ensure that it reflects the current reality and changes in your business and tax environment. You should review your documentation at least annually, or whenever there is a significant event or transaction that affects your transfer pricing policies or practices. You should also update your documentation to incorporate any feedback or findings from tax authorities, auditors, or advisors. You should also monitor the developments and trends in the transfer pricing landscape, and adjust your documentation accordingly.

6 Manage your documentation effectively

The final step is to manage your documentation effectively, to ensure that it is accessible, secure, and reliable. You should store your documentation in a centralized and organized manner, using a digital platform or a cloud-based solution. You should also protect your documentation from unauthorized access, loss, or damage, using encryption, backup, and recovery tools. You should also verify the accuracy and completeness of your documentation, using quality control, validation, and testing procedures.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?