Transfer pricing documentation refers to the contemporaneous records and business analyses maintained by taxpayers to substantiate that related-party transactions adhere to the arm’s length principle standard enshrined in international and domestic tax laws.
Key Components of Documentation:
- A description of controlled transactions, parties involved, and operational context
- Identification and analysis of selected transfer pricing method in line with functions/assets
- Details of the process underpinning comparable searches and independent data procurement
- Financial statements containing information used or created to apply the method
Example:
Failure to maintain sufficiently robust documentation on cost-sharing arrangements resulted in penalties for a pharmaceutical firm during a tax authority audit.
Takeaways:
Thorough transfer pricing documentation reinforces compliance and mitigates disputes by establishing the commercial rationales and economic substance of related-party agreements. Regular reviews ensure continued relevance to operations.