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What are the best practices for documenting transfer pricing policies and transactions?

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Transfer pricing is the process of setting and adjusting the prices of goods and services exchanged between related entities within a multinational group. It affects the allocation of profits and taxes among different jurisdictions and can have a significant impact on the financial performance and compliance of the group. Therefore, it is essential to document the transfer pricing policies and transactions in a clear, consistent, and comprehensive manner. In this article, you will learn about the best practices for documenting transfer pricing policies and transactions, based on the guidance from the OECD and various tax authorities.

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1 Define the scope and purpose

The first step in documenting transfer pricing policies and transactions is to define the scope and purpose of the documentation. This includes identifying the entities involved, the transactions covered, the applicable transfer pricing methods, and the objectives of the documentation. The scope and purpose should be aligned with the business strategy, the value creation drivers, and the arm's length principle. The purpose should also reflect the legal and regulatory requirements of the relevant jurisdictions, as well as the potential risks and opportunities of the transfer pricing arrangements.

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Joel Hogarth

Founder and Managing Director at Eliot & Luther
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More AI-speak which is not so much inaccurate as too generic to be helpful. First ask if you need a transfer pricing analysis. This will usually be because you are conducting a transaction between connected parties, which you want to rely on for tax purposes. Typically tax authorities expect connected party transactions to be conducted on arms-length terms - or on the same basis as if the parties were not connected. Then ask what the desired tax treatment is. This may be claiming a tax deduction or fixing the value of a taxable gain. A transfer pricing analysis is evidence supporting your desired tax treatment. It may be required by the relevant tax law or reserved as a defence against a potential challenge by tax authorities.

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2 Establish the functional analysis

The second step in documenting transfer pricing policies and transactions is to establish the functional analysis of the entities and transactions. This involves describing the functions performed, the assets used, and the risks assumed by each entity in relation to the transactions. The functional analysis should also include the contractual terms, the economic circumstances, and the business strategies of the parties. The functional analysis should provide a basis for selecting and applying the most appropriate transfer pricing method and determining the arm's length range of prices or margins.

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3 Apply the transfer pricing method

The third step in documenting transfer pricing policies and transactions is to apply the transfer pricing method chosen based on the functional analysis. This involves identifying and selecting the comparable transactions or entities, adjusting for any differences, and calculating the arm's length price or margin. The transfer pricing method should be consistent with the nature of the transactions, the availability of data, and the degree of comparability. The documentation should also explain the rationale and assumptions behind the transfer pricing method and the comparability analysis.

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Dean Andrews

Head of Tax and Restructuring Liability Insurance and Director at BMS Group
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This is the most important element. Ensuring the most relevant comparatives are used is vital to protect against challenge to the methodology used.

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4 Evaluate the outcomes and consistency

The fourth step in documenting transfer pricing policies and transactions is to evaluate the outcomes and consistency of the transfer pricing policies and transactions. This involves comparing the actual results with the arm's length range, testing the sensitivity of the results to changes in assumptions or data, and assessing the alignment of the transfer pricing policies and transactions with the economic substance and value creation of the group. The documentation should also demonstrate how the transfer pricing policies and transactions are consistent with the group's global transfer pricing policy, the arm's length principle, and the tax laws of the relevant jurisdictions.

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5 Prepare the master file and local file

The fifth step in documenting transfer pricing policies and transactions is to prepare the master file and local file, as recommended by the OECD. The master file provides an overview of the group's global business operations, transfer pricing policies, and intangible assets. The local file provides detailed information on the local entity's transactions with related parties, functional analysis, transfer pricing method, and outcomes. The master file and local file should be prepared in accordance with the OECD guidelines and the specific requirements of each jurisdiction.

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6 Update and maintain the documentation

The sixth and final step in documenting transfer pricing policies and transactions is to update and maintain the documentation on a regular basis. This involves reviewing and revising the documentation to reflect any changes in the business environment, the transactions, the transfer pricing methods, or the tax laws. The documentation should also be supported by relevant and reliable data and evidence, such as contracts, invoices, reports, and benchmarks. The documentation should be kept for as long as required by the tax authorities and be ready to be submitted upon request.

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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?

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Clint Engler

CEO/Principal: CERAC Inc. FL USA..... ?? ????????Consortium for Equitable Research, Analysis & Communication
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Document your transfer pricing like a meticulous detective: Focus on these key practices: Define scope and purpose: What transactions are covered? Why document them? Functional analysis: Map out roles, assets, and risks for each entity involved. Transfer pricing method selection: Justify your chosen method with data and evidence. Benchmarking: Show comparable companies and explain adjustments made. Intercompany agreements: Detail contractual terms and risk allocation. Regular updates: Keep documents current to reflect changes. Accessibility: Make documentation readily available to relevant parties. Remember, clear and thorough documentation can save you time, money, and headaches in the long run!

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What are the best practices for documenting transfer pricing policies and transactions?

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1 Define the scope and purpose

2 Establish the functional analysis

3 Apply the transfer pricing method

4 Evaluate the outcomes and consistency

5 Prepare the master file and local file

6 Update and maintain the documentation

7 Here’s what else to consider

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