A major part of the transfer pricing compliance burden can be assigned to the creation of the appropriate documentation. Financial transactions require detailed documentation in order to transparently share the analysis on a transaction-specific level to tax auditors. This article will share practical tips and tricks to structure and automate transfer pricing documentation in order to lower the compliance burden for corporates.
Consistency in transfer pricing
Fully mitigating all transfer pricing risks is not possible. However, corporates can drastically reduce disputes through consistency when pricing intercompany financial transactions. Therefore, Zanders recommends documenting the transfer pricing analysis for intercompany financial transactions with a two-staged approach: a transfer pricing policy and transaction-specific reports.
Part I: a transfer pricing policy
Creating an overarching transfer pricing policy for intercompany financial transactions is worth the effort. Such policy would typically support audits in two ways. Firstly, it could serve to describe the general outset of the pricing process. Additionally, it should also provide more information on the underlying models and assumptions. For example, it could explain the data sources used to search for comparable transactions.
Secondly, the policy should also give guidance on the interpretation of subjective assessments that are part of the pricing process. For example, various factors are considered best practice in order to identify the level of implicit support. However, not all of these factors are uniformly defined.
This policy will enable corporates to prove that similar transactions are priced in a similar fashion, e.g. all intercompany loans follow the same pricing process regardless of the size or sensitivity of the loan.
Part II: transaction-specific reports
Creating transaction-specific reports at the time of the pricing analysis entails many advantages. As it should document how the transfer pricing policy is followed when pricing a particular transaction, it should at least capture the transaction-specific details. For example, the analysis may include a credit rating assessment. The credit rating methodology is explained in the policy. The financials and the financial scoring are placed in the transaction-specific report. Comparables are a crucial part of transaction-specific reports as well.
Save time through technology
The creation of a transfer pricing policy for financial transactions is a one-off manual effort which requires an initial time investment. Ideally, it is created through a cooperation of both tax and treasury professionals and reviewed annually.
In contrast to the transfer pricing policy, technology can save practitioners time by automating the creation of transaction-specific pricing reports. As each transaction should be a reflection of the methodology, treasury and tax professionals could create a template that outlines the process. An automatic feed of the relevant transaction-specific data, e.g. market data, transaction characteristics, comparables, proposed pricing, etc., could help to fill this template with minimal effort.
In order to accurately document a transfer pricing analysis for financial transactions, it is advised to create a policy as well as transaction-specific reports. The policy captures the outset and methodology of the pricing process whereas the transaction-specific reports outline the calculation itself. Working with templates can significantly reduce the time spent on documentation by automating the creation of transaction-specific transfer pricing reports.