KPMG report: Transfer pricing documentation viewed as ongoing process, not a short-term project

High-quality and globally consistent transfer pricing documentation has steadily gained in importance. Enhanced compliance can be achieved by implementing a risk-based ongoing process instead of independent short-term projects when preparing documentation reports. This also offers potential time and cost savings.

In recent years, tax administrations have increasingly requested, analyzed, and challenged transfer pricing documentation as part of their tax audits. This increased scrutiny has been accompanied by stricter and more comprehensive local documentation requirements, often with deadlines or the obligation to submit transfer pricing documentation reports proactively. 

To meet these increased requirements, companies need to rethink their documentation approach.

At the global level, OECD Action 13 of the base erosion and profit shifting (BEPS) framework provides guidance on the content and structure of transfer pricing documentation. The three-tiered approach includes (1) a Master file, (2) Local files, and (3) for large multinationals, a country-by-country (CbC) report. One of the main objectives of the transfer pricing documentation requirements is to provide tax administrations with sufficient and useful information, enabling them to conduct appropriate risk assessments and transfer pricing audits. Therefore, taxpayers need to consider (in some cases, it may be mandatory) to prepare transfer pricing documentation on an annual basis.

In the past (and even currently), some companies often considered the preparation and maintenance of transfer pricing documentation as a series of projects to be only addressed when requested by the tax authorities or when spare resources were available internally. While in such instances, the Master file is typically prepared centrally, the Local files are prepared on an ad-hoc basis, usually with the help of local advisors. This in turn can result in an inconsistent and unstructured approach with varying interpretations and levels of detail. Further disadvantages of this approach may include:

• Duplication of efforts, as local advisors do not communicate with each other to leverage similar information
• Synergies cannot be exploited, which increases costs and reduces efficiency
• Proneness to errors due to time constraints, as tax administrations only provide a short period of time to provide the requested documentation
• Inadequate and unstructured maintenance of the documentation

In general, resources are allocated according to urgency rather than actual risk or importance. As a result, this approach generally does not lead to high-quality and globally consistent transfer pricing documentation that meets the expectations of the tax authorities.

By implementing a transfer pricing documentation process, the above-mentioned disadvantages can be eliminated. 

Establishing a transfer pricing documentation process can centralize the management of the transfer pricing documentation preparation and maintenance and achieve global consistency. This also includes the preparation of standardized transfer pricing documentation templates. 

Similar to other annual processes—such as the preparation of the annual report and tax returns—a recurring schedule would indicate who (that is, corporate or local management) is responsible for these deliverables. Corporate management also may need to consider the company’s risk appetite. For example, in a risk-averse situation, Local files for each individual subsidiary would be prepared annually, irrespective of the perceived risk level connected to transfer pricing. However, regardless of the risk appetite established, changes in local regulation and related documentation requirements need to be continuously monitored. Furthermore, some countries have specific local requirements that may differ from or go beyond the standardized OECD template. The decision on whether and to which extent to further localize these files can be taken by management based on the company’s defined risk appetite.

The benefits of a regular, standardized annual process include:

• Standardized Master and Local file templates leveraging synergies and providing for company-wide consistency
• A defined data gathering process providing internal clarity and improved documentation quality
• Resources allocated based on actual risk or importance

Ultimately, a transfer pricing documentation process not only enhances compliance, but also quality and saves time and money.

To get the most benefit from automation, taxpayers may want to implement a robust, standardized process. Once a standardized documentation process is in place, efficiency can be further maximized by automating parts of the process. For instance, automating repetitive manual tasks can further minimize the use of resources, increase cost savings, and improve quality. 

Taxpayers seeking to enhance compliance in the transfer pricing documentation can:

• Evaluate their current approach to transfer pricing documentation
• Identify potential efficiency gains and cost savings opportunities
• Design a risk-based ongoing transfer pricing documentation process
• Automate manual and repetitive tasks

Read a January 2022 report prepared by the KPMG member firm in Switzerland