Transfer Pricing Documentation

Chapter 7
Transfer Pricing Documentation

Documentation is a key element of TP as it serves as indispensable evidence for demonstrating the arm’s length nature of the Controlled Transactions.

Countries with TP Regulations have their own set of rules as regards maintenance and provision of documentation to the tax authorities. In addition, the OECD to has included the same as part of its guidance, which has been incorporated by individual countries in their legislation. The BEPS project has devoted considerable effort to TP Documentation. Specifically, it has replaced the earlier chapter on TP Documentation in the OECD TP Guidelines.

BEPS Action Plan 13 has suggested a three-tiered approach to TP Documentation with a view to providing relevant and reliable information to tax administrations to assess the TP risks involved.

“Documentation is the key for any organization that comes under the ambit of Transfer Pricing Regulations”.

The three-tiered approach consists of:

1. A Master File:

Providing an overview of the business activities of the MNE, viz. description of the business and its important services/ business drivers, ownership of intangibles, financing activities, and consolidated financials.

In other words, the Master file will provide revenue authorities with high-level global information regarding the global business and TP policies that are adopted by the Group for each category of the Related Party transaction.

2. A Local File:

Providing information on material inter-group transactions of the local entity and its business activities.

In other words, the Local file is akin to more transactional TP documentation where information on related party transactions, the TP method adopted and related party transactions are included.

3. Country-by-Country Report (“CbCR”)

Providing information on tax jurisdiction-wise allocation of income, taxes paid, economic activity, and taxes accrued.

These three documents will provide tax administrators with useful information to assess TP risks and determine where audit resources can be deployed effectively.

As stated earlier, there are Country specific documentation Rules and OECD-recommended documentation. Most countries require documentation to be maintained on a contemporaneous basis to the extent feasible.

Generally, TP Documentation would include:

• Enterprise-wise documents (Ownership, Group profile, transacting parties' business activities, industry profile, etc.)
• Transaction-specific documents (details of relevant transactions, transacting parties, transaction-wise FAR analysis, Group TP Policy/transaction pricing policy, generally available market reports, the record of comparable/uncontrolled transactions,s and the most important one being the economic analysis undertaken to test the arm’s length principle.)
• ALP computation documentation (Method applied, critical assumptions, adjustments carried out to align with ALP, etc.)