Their challenges, data points, and 11 pragmatic proposals to deal with them

When preparing transfer pricing documentation, local requirements have been a headache for both: consultants wishing to practice internationally, and international companies centralizing compliance processes.

Such local requirements can be a matter of form, substance, and/or language. While the OECD creates templates to standardize and simplify local requirements, countries remain independent in their legislative processes. OECD requirements are therefore sometimes only partially implemented or even new requirements are being added outside of OECD guidelines.

To develop our localization feature, we analyzed the domestic legislation of 126 countries. 31 countries were identified to have conditions requiring an additional or independent data point from those already established by the OECD.

Concerning the type of requirement, most of the requirements identified as additional are related to substance and not to form. The exceptions are Italy in Europe and Ecuador in South America. Both countries have a strict presentation format for the documentation. Italy even penalizes if the format is not applied by the taxpayer.

As an expert, after many years of practice, you believe that the time comes, when you have seen it all. But that is not the case, and that is why the world of transfer pricing is so fascinating. We can constantly surprise ourselves.

Within the transfer pricing legislative framework, we commonly find requirements that are not mentioned by the OECD but are a common denominator in many other countries.

These types of requirements are for example:

• Certain aspects of the company’s history
• Additional details around the industry analysis
• Number of employees per operating department
• Address and description of related parties
• Tax ID number of related parties
• VAT related parties' number
• Audited reports
• Segmented financial information
• Reasons for not selecting a specific transfer pricing method

Below you will find 11 less common requirements that have come to our attention as a result of our transfer pricing localization analysis. We have described and classified these so called uncommon requirements according to the type of challenge they represent, and the OECD data point they might relate to. In the following we present a pragmatic proposal on how to deal with these requirements for documentation purposes.

The identified challenges can be classified in terms of interpretation, compliance related to other legal areas, and data gathering.

Country: DENMARK

Documentation Requisite: Description of the individuals working for the legal entity.

Challenge: Interpretation. The description of individuals can be interpreted in two ways. Firstly, as the decision power of all individuals working for a legal entity, which would be an exhausting exercise if we stick by the law.

Secondly, as the description of the individuals from a professional perspective by presenting their resume, which could derive in data protection issues (under GDPR regulations) and could be misinterpreted by the tax administration.

Related Data Points: Management Structure is an identified related data point already established by the OECD.

We often get the question from users, what level they should go in terms of management structure. Denmark mentions the description of individuals working for the legal entity. To get close to an appropriate interpretation we should ask ourselves: How is this information going to help the tax administration? Presenting every employee`s information will not be helpful. Only significant functionaries and decision makers are relevant for transfer pricing analysis, especially at a first audit stage.

Pragmatic proposal: Keep it simple. Present only decision-making individuals, their reporting structure, and title.

Country: ARGENTINA

Documentation Requisite: Full names of the president, or of the person who has held an equivalent position in the last three (3) years within the economic group, and indication of the place of residence.

Challenge: Compliance related to other legal areas. Presenting the Surname and first name of individuals might have consequences from a data protection perspective, especially if the president or equivalent of the group is in Europe and the Argentinian entity is providing the information locally.

Related Data Points: Management Structure is an identified related data point already established by the OECD.

Pragmatic proposal: Avoid the disclosure of European citizens, mention the position and reporting structure, and reference the European GDPR Directive.

Country: CHINA

Documentation Requisite: Include information on outbound investments, including the locations, amounts, main businesses, and strategic plans of the investment projects.

Challenge: Data gathering. In a lot of cases MNEs deal with the challenge that business runs parallel to tax and one area does not necessarily communicate every investment plan to the tax department.

Related Data Points: Business Restructuring is an identified related data point already established by the OECD.

Pragmatic proposal: Include the information about strategic plans when the investment projects are taking place. Focus on real impact from a transfer pricing perspective.

Country: FINLAND

Documentation Requisite: Include the value of goodwill, ongoing business, concerned to the functional analysis. Intangible assets can be considered as a whole in a transfer situation and do not need to be classified into different categories.

Challenge: Data gathering. Goodwill is an intangible asset that is usually associated with the purchase of a company. Goodwill is the portion of the purchase price that is higher than the sum of the net fair value of all the assets purchased in the acquisition and the liabilities assumed in the process. Legal entities might have goodwill data available on a legal entity basis. Nevertheless, depending on the type of reporting the legal entities might report on a transactional basis, TP Model basis or TP Function basis for which calculating a separate good that will be linked to a transfer pricing policy, can be extremely difficult.

Related Data Points: Business Restructuring is an identified related data point already established by the OECD.

Pragmatic proposal: Since goodwill has a real and direct impact on M&A include this data in Business Restructurings information when there is an actual intercompany acquisition/sale of business.

Country: GREECE

Documentation Requisite: A list of cost allocation agreements, pre-approval decisions of intra-group pricing methodology, and court decisions concerning group members, about price setting of intra-group transactions.

Challenge: Data gathering. Court decisions imply an additional work for the taxpayer. Not only will the taxpayer need to gather MNE data but also court decisions among the group.

Related Data Points: The OECD does not require any data point related to the court decisions.

Pragmatic proposal: Manage all audit related data in your data warehouse including audit results from other legal entities among the group.

Country: ICELAND

Documentation Requisite: Include information on how the pricing decisions were made and what method according to the OECD Guidelines was used for the pricing. Whether the pricing was based on guidance from independent experts or other available methods.

Challenge: Data gathering and interpretation. Especially for cases where recommendations from independent experts can be taken into consideration, but it is not a clear who the decision maker in terms of transfer pricing policies is.

Related Data Points: Methods is an identified related data point already established by the OECD.

Pragmatic proposal: The Method Selection Reason and Application include a general comment in relation to independent experts and their involvement in the ALP application for the whole Group.

Country: INDIA

Documentation Requisite: Include a description of the functions performed, assets employed, and risks assumed for the group entities that contribute ten percent (10%) or more of the consolidated revenues, assets, or profits of the group.

Challenge: Interpretation. Although the common practice has developed into presenting a list of all the group entities meeting the threshold as mentioned above(and their description of functions performed, assets employed, and risk assumed by each of the group entities that meet the prescribed thresholds) this requirement could be already fulfilled by the economic analysis of a regular transfer pricing study. The difference in this case is the threshold.

Related Data Points: Functional Analysis is an identified related data point already established by the OECD.

Pragmatic proposal: The common practice is to present a separate list of FAR analysis for the mentioned threshold.

Country: INDONESIA

Documentation Requisite: Describe Pricing policies implemented for the last five (5) years.

Challenge: Data gathering. Gathering the information for previous five years (5) requires a good level of data management within the Group.

Related Data Points: Methods is an identified related data point already established by the OECD.

Pragmatic proposal: Manage all transfer pricing related data in your data warehouse including transfer pricing policies applied in the past.

Country: SRI LANKA

Documentation Requisite: Official publications, reports, studies, and data bases from the Government of the country of residence of the associated enterprises, or of any other country relevant to the case.

Challenge: Interpretation. This requirement is a good example of a tax administration wanting to see something but not being sure what exactly they want to see. A sort of: “anything that you think might help”. Why? Because no one knows the company better than the taxpayer. What kind of publications or reports will be presented is decided by the taxpayer.

Related Data Points: Entity Description is an identified related data point already established by the OECD.

Pragmatic Proposal: As described above, when deciding what to include as Government data bases or reports always think about the information that helps the auditor understand your comparability analysis.

Country: UNITED STATES

Documentation Requisite: Include a description or summary of any relevant data that the taxpayer obtains after the end of the tax year and before filing a tax return, which would help determine if a taxpayer selected and applied a specified method in a reasonable manner. A general index of the principal and background documents and a description of the record-keeping system used for cataloging and accessing those documents.

Challenge: Interpretation. What kind of information should the taxpayer include?

Related Data Points: Method Selection Reason and Application is an identified related data point already established by the OECD.

Pragmatic proposal: As described above, when deciding what to include as additional information always think about the information that helps the auditor understand your comparability analysis.

Country: ZAMBIA

Documentation Requisite: Include the statutory rules of the relevant business sector.

Challenge: Data gathering. A centralized transfer pricing team outside of Zambia will need to be well coordinated and informed about statutory rules that apply to the legal entity due to the specific business sector the entity belongs to.

Related Data Points: Entity Description is an identified related data point already established by the OECD.

Pragmatic proposal: Include only information that has an impact for transfer pricing and or corporate tax.

Conclusion

The challenge presented by the transfer pricing information requirements can be approached from three angles. Irrespective of the type of challenge they represent. First angle is the relationship of each of these requirements to data points already established by the OECD.

The second angle is the management of previous information related to audits and corporate information that is only possible through a data warehouse. The third angle is the fulfillment of local requirements through a pragmatic approach that should always refer to the question - how is this information going to help the tax administration in the understanding of the group policies and application of the ALP focusing on providing valuable data to the tax administration and minimizing the amount of narrative.

About the author:

Brigitte Baumgartner Garcia works as a Digital Transfer Pricing Expert at Aibidia. Brigitte has more than 10 years of experience in transfer pricing with a background in government, industry and consulting. Brigitte often speaks on digital transfer pricing in international conferences and workshops.