Worldwide: The Evolution Of Transfer Pricing Documentation

Last Updated: 26 July 2016
Article by Crowe Horwath First Trust


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.


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.

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