As U.S. Companies extend their operations internationally and create entities in other countries, transfer pricing becomes crucial. It's advisable that businesses devise their own transfer pricing policies to follow both local and international rules regarding transfer pricing. Additionally, U.S. Companies with intercompany transactions should produce their transfer pricing documentation annually to comply with the regulatory requirements. We present some examples of best practice when drafting the transfer pricing documentation.
1. Understanding Company’s Business Model
One of the initial tasks when developing the transfer pricing documentation is to understand the company’s business operations and how they correspond with intercompany transactions. Companies are advised to conduct a supply chain analysis (functional analysis) to identify the main value drivers of the Group and the utilization of these drivers throughout the supply chain and their relation to the intercompany transactions. Subsequently, a comprehensive risk assessment for each entity involved in the intercompany transactions is relevant. It is also suggested to list the relevant functions and activities performed by each entity.
2. Review of Transfer Pricing Policy
In connection with the first step, it is important to understand the existing transfer pricing policy for each intercompany transaction, its implementation and the information generated and review its compliance with the arm’s length principle. Nowadays, most of the tax authorities expect that Companies maintain and gather that type of information.
3. Drafting of Intercompany Agreements
It's advisable for businesses to create concurrent intercompany agreements for their transactions, which serve as proof of the key terms agreed upon. Sometimes, a formal written agreement may not exist, but oral or informal written agreements might. Companies should gather this evidence as it can be valuable when preparing transfer pricing documentation.
4. Understanding Regulatory Requirements and Timely Preparation
As previously stated, U.S. Companies with intercompany transactions must comply with local regulatory requirements for transfer pricing, which are typically associated with tax laws. Specifically in the U.S., The Internal Revenue Service (IRS) has specific requirements for transfer pricing documentation under Section 6662(e) and Treasury Regulation § 1.6662-6. These regulations mandate that taxpayers select and apply a transfer pricing method in a reasonable manner and maintain sufficient documentation to support their transfer pricing. Most of the transfer pricing regulation are consistent the arm’s length principal and follow similar methodologies.
The U.S. transfer pricing documentation should be prepared contemporaneously with the filing of the tax return. Other Countries may have specific deadlines for the submission and maintenance of transfer pricing documentation. It is recommended that the tax compliance department of the Company pays careful attention to these details to prevent penalties.
It is advisable, according to best practices, to maintain consistency in the documentation for the Group's various transfer pricing regulations and to apply similar methodology where possible. While local requirements may vary, the overarching approach and findings should be consistent. To ensure such uniformity, centralizing the transfer pricing documentation is recommended.
5. Comprehensive Documentation
The transfer pricing documentation should include all the requirements established in the transfer pricing regulations. Additionally, it should be a comprehensive document including among other items, the following:
- Company’s business model, their structure, their intercompany transactions (including the description of the transaction, intercompany policy, the facts and circumstances relevant to the intercompany transaction (functions, risk and assets) and an industry analysis.
- The selection of the Best or most appropriate method, according to the methods applicable under each regulation.
- The application of the selected method to support the arm’s length principle. In most of the cases it will require the selection of internal or external comparable. The selection of the comparable should include the steps and assumptions applied for selecting the comparable transactions.
- Finally, the document should include the conclusion for the application of the selected method and compliance with the arm’s length principle, if applicable.
- Additional data should be collected and preserved to back up the analysis conclusion, which may be incorporated into the documentation or retained by the company in case it is needed by the relevant authorities.
6. Continuous Oversighting
It is a best practice for companies to regularly reassess its business strategy, international growth, and intercompany transactions since the industry landscape and company structure—including acquisitions or shifts in the business model—can evolve annually. Promptly identifying and adapting to any change is important to prevent any potential misalignments between the transfer pricing policy/ documentation and actual business situations. Timely collection of corroborative documentation or evidence is recommended.
7. Establishing a Team that Leads Transfer Pricing Practice
Companies should establish a responsible person for ensuring the compliance of the U.S. and Global transfer pricing documentation requirements as well as other aspects related to the transfer pricing and intercompany transaction. It is best practice to seek advice from professionals with transfer pricing experience and interact accordingly with the Company’s responsible for transfer pricing.
Significantly penalties and adjustment related to transfer pricing have been assessed to Companies that do not comply with the arm’s length principle and that did not produce contemporaneous transfer pricing documentation. Therefore, it is recommended that the U.S Companies address correctly their transfer pricing documentation requirements.
The information provided in this article is meant for general information purposes only and should not be taken as professional advice. It does not necessarily represent the views of the authors, facilitators, or TP CUBIT. While all attempts have been made to verify the accuracy of the information at the time of publication, the author, facilitator, and TP CUBIT are not responsible for any losses or liability that might arise from using or relying on the contents of this article.
