Worldwide: The Evolution Of Transfer Pricing Documentation

Last Updated: 26 July 2016
Article by Crowe Horwath First Trust
Most Popular Article in Singapore, July 2016

Introduction

Increasingly, transfer pricing documentation is an important focus area for both taxpayers and tax authorities. Over the past decade, tax authorities in the Asia Pacific region have strengthened their transfer pricing documentation requirements in tandem with the introduction of transfer pricing regulations (be it formal legislation or guidelines) in their jurisdictions as shown in the table below. Several tax authorities in countries such as Singapore, Malaysia and Australia have also, in recent years, stipulated the preparation of transfer pricing documentation on an annual basis.

Country TP Regulations issued Documentation
Australia 1997 / 2013 Mandatory
China 2009 Mandatory
Hong Kong 2009 Recommended
Indonesia 2008 / 2010 Mandatory
India 2001 Mandatory
Japan 2001 Highly recommended
Korea 2004 Highly recommended
Malaysia 2003 / 2012 Mandatory
Philippines 2013 Mandatory
Singapore 2006 / 2015 Mandatory
Taiwan 2004 Mandatory
Thailand 2002 Recommended
Vietnam 2005 / 2010 Mandatory

Historically, under the OECD Transfer Pricing Guidelines, transfer pricing documentation was merely a best effort by taxpayers to show that adequate considerations had been made to ensure that the transfer prices were compliant with the arm's length principle.

However, with the increase in mandated requirements for transfer pricing documentation due to transfer pricing provisions being legislated, transfer pricing documentation has taken on a more defined structure.

When tax authorities explicitly request for a transfer pricing documentation report, they are expecting a compiled report that details the various facts and circumstances that the taxpayer has accounted for in undertaking an analysis under the arm's length principle. This essentially requires the following information to be detailed in a well-presented report:

  1. The taxpayers involved in the related party transaction(s), which will typically be detailed in the Group overview / Company overview of the report;
  2. The transactions at issue, often outlined in the Transfer Pricing Policy;
  3. The functions performed, the assets used and the risks borne by each party to the transaction, which will typically be detailed in the Functional Analysis. The functional analysis will provide an indication as to how the parties to the transaction should be remunerated. In addition, the functional analysis will provide insights on how information from independent enterprises should be treated in justifying the arm's length nature of the transfer prices;
  4. Information derived from independent enterprises engaged in similar transactions or businesses, as outlined in the Economic Analysis; and
  5. Other macroeconomic / industry specific factors that will provide additional insights on the transfer pricing policy, as detailed in the Industry Analysis.

With the recent global tax and transfer pricing changes, as detailed in the next section, it is expected that more tax authorities will be modifying their transfer pricing legislation.

BEPS and the evolution of TP documentation

The Base Erosion and Profit Shifting ("BEPS") project has devoted considerable effort on transfer pricing documentation. Specifically, BEPS Action Plan 13 has replaced the earlier chapter on transfer pricing documentation in the OECD Transfer Pricing Guidelines.

These guidelines suggest a three-tiered approach to transfer pricing documentation with a view to provide relevant and reliable information to tax administrations to assess the transfer pricing risks involved.

The three-tiered approach consists of:

  1. A Master file – providing an overview of the business activities of the MNE providing description of business and its important services/ business drivers, ownership of intangibles, financing activities and consolidated financials. In other words, the Master file will provide tax administrations with high-level global information regarding the overall global business and transfer pricing policies that are adopted by the Group for each category of related party transaction.
  2. A Local file – providing information on material inter-company transactions of the local entity and its business activities. In other words, the local file is akin to more transactional transfer pricing documentation where information on related party transactions, the transfer pricing method and third 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 administrations with useful information to assess transfer pricing risks and determine where audit resources can be deployed effectively. It is, therefore, clear that the purpose of transfer pricing documentation is no longer solely for taxpayers to demonstrate compliance with the arm's length principle.

While Action Plan 13 has substantially changed as to when and how transfer pricing documentation should be prepared, it should be noted that it does not have any jurisdictional rights. Action Plan 13 only provides suggestions to tax authorities on how their existing transfer pricing regimes can be strengthened in line with the global collaboration on BEPS. Hence, the adoption of Action Plan 13 is essentially at the discretion of the tax administration.

In this regard, to what extent tax administrations will adopt Action Plan 13 is debatable. For example, the Inland Revenue Authority of Singapore ("IRAS") has recently announced its commitment to implement CbCR, as a BEPS Associate, for financial years beginning on or after 1 January 2017 for multinational enterprises whose ultimate parent entities are in Singapore and whose group turnover exceed S$1,125 million. Further guidance on the exact implementation of CbCR processes by IRAS in Singapore are expected by September 2016.

Similarly, the Australian Tax Office ("ATO") and the State Administration of Taxation ("SAT") in China have, in principle, agreed to OECD's Action Plan 13 but are currently debating the implementation of these principles into local legislation. Other countries like Myanmar and Cambodia currently have not legislated necessary transfer pricing provisions. It is thus unlikely that they will adopt the recommendations of Action Plan 13 any time soon.

Managing your transfer pricing documentation requirements

Despite the varying extent of implementation of Action Plan 13 amongst the tax authorities, the importance of transfer pricing documentation will certainly increase over time and it is anticipated to be a significant compliance burden. So, what can you do as a taxpayer to be better prepared?

  1. Understanding your requirements in the post – BEPS era

    In order to be ready to address Action Plan 13, it is necessary to first understand what your obligations are, as a taxpayer. It is therefore necessary to keep track of which countries are implementing Action Plan 13 and in what form. Such an understanding will help taxpayers to properly manage their reporting obligations.

    For example, based on our understanding of the transfer pricing documentation requirements in the Asia Pacific region, despite the similarity in contents of Local file and domestic transfer pricing documentation, there may not be a one-to-one match between the two reports. Thus, unless additional clarity is provided by the tax administrations, it is likely that taxpayers would have to prepare transfer pricing documentation reports as well as the Local file.
  2. Re-alignment of processes and IT systems in the post – BEPS era

    It is clear that the three-tiered approach detailed in Action Plan 13 is about collecting and presenting information in a consistent and confidential manner across all jurisdictions. Therefore, the manner in which taxpayers have been collecting, analysing and using information is bound to change.

    This may require expanding the responsibilities of existing employees as well as managing their access rights to the extent that they are dealing with sensitive data. We advise taxpayers to map out how some of these organisational changes should be effected to ensure a cost effective and efficient information gathering process.
  3. Maintenance of additional documentation / records

    Although the three-tiered approach stipulated by Action Plan 13 provides a detailed list of the information that should be maintained, some of this information may not exist within an organisation. For example, the local file requires copies of material intercompany agreements to be included. However, we are still encountering numerous situations where multinational enterprises do not have any intercompany agreements and do not see the need for these either because the transactions are all occurring within the Group. Although not explicitly required in Action Plan 13, it is suggested that details of minutes of meetings / meeting notes / budgets / price negotiations be maintained to provide support around the transfer pricing policy.

Conclusion

It may take some time for the impact of Action Plan 13 to be fully applied in practice. However, the recommendations of Action Plan 13 and other Action Plans reinforce the need for businesses to take a critical look at how they will continue to operate in multiple jurisdictions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.