As U.S. companies extend their operations internationally and establish entities in other countries, transfer pricing becomes increasingly important. Transfer pricing policies provide a framework for aligning intercompany pricing with business operations, applicable local requirements, and international principles. An annual review of transfer pricing documentation can help U.S. companies identify updates needed to reflect their intercompany transactions and support the arm’s length nature of their pricing, taking into account applicable documentation and penalty protection requirements. The following sections outline practical considerations for preparing transfer pricing documentation.
1. Understanding Company’s Business Model
One of the initial tasks when developing transfer pricing documentation is to understand the company’s business operations and how they relate to its intercompany transactions. Companies may benefit from a supply chain analysis, supported by a functional analysis, to identify the Group’s main value drivers, how they are utilized throughout the supply chain, and their relationship to intercompany transactions. The functional analysis should consider the functions performed, assets employed, and risks assumed by each entity involved in the relevant transactions.
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, how it is implemented, and the supporting information generated. The review should consider whether the policy and its implementation are consistent with the arm’s length principle. Relevant records provide support for the policy and its application.
3. Review of Intercompany Terms and Agreements
Contemporaneous agreements and other relevant records help establish the key terms of intercompany transactions. For purposes of the transfer pricing analysis, companies should gather existing agreements and supporting evidence of the terms applied in practice. Where formal written agreements are not available, other records may help explain the arrangements between the parties. The analysis should consider whether the documented terms are consistent with the parties’ actual activities. The preparation or amendment of legal agreements is a matter for appropriate legal counsel.
4. Understanding Documentation Standards and Timely Preparation
In the U.S., transfer pricing documentation provides a technical economic analysis of intercompany transactions under the arm’s length principle reflected in Section 482 and the related Treasury Regulations. Section 6662(e) and Treasury Regulation § 1.6662-6 establish requirements relevant to documentation-based protection against certain transfer pricing penalties. The analysis should explain the economic basis for the methodology applied, including its reliability in evaluating the arm’s length nature of the intercompany pricing, taking into account the available information, relevant facts and circumstances, and applicable methodological standards.
The analysis should be prepared contemporaneously and maintained in the Company’s records. For purposes of the U.S. documentation-based penalty protection provisions, the documentation generally must be in existence when the federal income tax return for the relevant year is filed and must be provided to the IRS within 30 days of a request in connection with an examination. These timing requirements should be considered when planning the preparation and retention of the analysis. Other countries may have different documentation, submission, and retention requirements.
Consistency across the group’s transfer pricing documentation supports a coherent explanation of its intercompany arrangements. Similar methodologies may be appropriate where supported by the relevant facts and local requirements. Differences in functions, assets, risks, market conditions, or applicable requirements may warrant different approaches or conclusions. Centralizing the preparation and coordination of transfer pricing documentation can help support consistency while allowing for appropriate local differences.
5. Comprehensive Documentation
Transfer pricing documentation explains the factual, technical, and economic basis of the analysis. Depending on the transactions and applicable documentation standards, relevant content may include the following illustrative, non-exhaustive items:
- The company’s business, organizational structure, and intercompany transactions, including relevant terms, facts and circumstances, and a functional analysis of the functions performed, assets employed, and risks assumed.
- The evaluation of available methodologies and the technical reasons supporting the approach applied, including consideration of alternatives.
- The application of the methodology, including relevant data, assumptions, comparability analysis, and adjustments, where applicable.
- The findings and conclusions of the economic analysis, including relevant limitations.
- Supporting information and records, including relevant updates and an index identifying the principal and supporting documents.
6. Ongoing Monitoring
Periodic reassessment of business strategies, international growth, and intercompany transactions helps identify developments relevant to the transfer pricing analysis, including acquisitions, changes in industry conditions, and changes in the business model. Timely identification and assessment of these changes can help companies address potential misalignments between their transfer pricing policies, documentation, and actual business operations. Timely collection and retention of supporting documentation help substantiate the analysis and explain changes over time.
7. Coordination of Transfer Pricing Documentation
A designated person or team can coordinate the preparation, review, and maintenance of U.S. and global transfer pricing documentation, related policies, and intercompany information. This process may involve professionals with relevant transfer pricing experience, working with the company’s accounting, tax, and legal advisers as appropriate.
Transfer pricing adjustments and related penalties may arise when intercompany pricing does not meet the applicable standards. Contemporaneous documentation explaining the economic basis, reliability, and application of the methodology used to evaluate intercompany pricing may help support eligibility for protection against certain transfer pricing penalties, subject to the applicable requirements. The preparation of documentation alone does not guarantee penalty protection.
The information provided in this article is for general informational purposes only and does not constitute tax, legal, accounting, or other professional advice. It does not necessarily represent the views of the authors, facilitators, or TP CUBIT. The discussion is general in nature and may not address the specific facts, circumstances, or requirements applicable to a particular company, transaction, or jurisdiction. Readers should consult qualified professionals before making decisions or taking action based on this information. Reading this article does not establish a professional-client relationship with TP CUBIT. Although reasonable efforts have been made to verify the accuracy of the information as of the publication date, no representation or warranty is made regarding its accuracy, completeness, or continued applicability. Laws, regulations, and interpretations may change. To the extent permitted by applicable law, the authors, facilitators, and TP CUBIT disclaim liability for losses arising from the use of or reliance on this article.
