Transfer pricing template / example documentation
article published on 27 January 2022
The transfer pricing template / example documentation is a framework document that one may be using to start from in building the so called “transfer pricing documentation” and at the same time serving also as a guideline for the one using it.
The best and most effective / efficient transfer pricing documentation is often created when having as a starting point an exceptional transfer pricing template / example documentation that allows to focus more on the problems and challenges specific to the business rather than on meeting the structure requirements.
Even though one may have seen a plethora of different transfer pricing template / example documentations, largely all of them follow same minimum standard that OECD has involuntarily set via Chapter V of the OECD Transfer Pricing Guidelines for MNE:
- Transfer Pricing Master File (including information on the group);
- Transfer Pricing Local File (including information on the company);
- Transfer Pricing Transactions Analysis (including information both on the company and on the group).
In the table of contents below, you may find a detailed and comprehensive structure built by us along our many years of practice with various jurisdictions, a structure that is embedding all the elements referred to in Chapter V of the OECD Transfer Pricing Guidelines:
Apart from the transfer pricing template / example documentation you can ask from us by filling in the form below, it is important to remember that the process followed during the preparation of a transfer pricing documentation file has also a paramount role.
The process has such an importance that actually not having a process in place can lead into creating a faulty transfer pricing documentation that may endanger your position in relation to the tax authorities.
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The transfer pricing template / example documentation has to be complemented by a process
As emphasized earlier, the transfer pricing template / example documentation is a good starting point but unfortunately it is not enough to enable just anyone to prepare a transfer pricing documentation in an utmost effective manner.
It is our practical experience that most of the times, having a process in place may have a definitive contribution to the creation of a good transfer pricing documentation in a manner that also makes sense from an economical perspective (i.e. invest a reasonable amount of time into preparing such transfer pricing documentation file).
In our very own highly specialized transfer pricing practice we’ve built along the years a step-by-step process of using the transfer pricing template / example documentation. For each of these steps that we’ve detailed below, we also included a couple of tips and tricks that may help you get going and avoid some of the most important pitfalls during the process.
Step 1 – Mapping and understanding the intra-group transactions
The intra-group transactions mapping process is a crucial first step in preparing a transfer pricing documentation file – simply said, without an intra-group transactions map it would be like a sailor would try to navigate without a compass.
Therefore, you need to prepare first a list of the intra-group transactions typologies and then find out as many information as possible with regard to each typology of transactions e.g. determine the annual amounts of these intra-group transactions.
After mapping the intra-group transactions and knowing all that can be known about those transactions it is time to get to the next step in the process.
Step 2 – Preparing a list of preliminary information to be gathered
Up until this step of the process one may have acquired some general knowledge but in addition to that general knowledge, documents have to be gathered in order to further analyze them and further understand the details behind each and every transaction but also to understand more about the company and about the group of companies.
In order to gather the required information, a list of required documents has to be compiled, a list that may include more generic items as copies of the related party agreements, but depending on the previous intra-group transactions mapping may also include various specific elements that may help in clarifying certain aspects specific to a certain intra-group transaction or regarding the company interaction with the group of companies.
Step 3 – Filling up the company, group and transactions description sections from the transfer pricing template / example documentation
Only once the requested preliminary information is gathered, the process of filing the transfer pricing template / example documentation can truly start with description of the group, companies and intra-group transactions.
Even though this may seem a straightforward process, it has to be noted though that various specific transfer pricing / international taxation terms may be used along the document. The process of understanding all these terms may prove itself a cumbersome one that may require a significant amount of time investment.
Step 4 – Preparing the economic and functional analysis based on the transfer pricing template / example documentation
After the description of the group, companies and transactions are filled in with information, you will get to the most challenging part of the project.
This stage requires intensive work and critical analyses to be performed during the functional analysis meetings, drafting of the functional analyses within each of the intra-group transactions, determining the transfer pricing methods to be used, determining what would be the most appropriate party to test, what profit level indicators to use and so on.
Probably that in more than 50% of the intra-group transactions, the transactional net margin method is chosen as most appropriate method. And not just that this method is chosen but in most of these cases the application of the method will involve the usage of an external benchmarking study prepared in specialized transfer pricing databases.
Even though this external benchmarking study may be considered a component of the economic analysis, it is of such a high complexity that it worth being separated into a different step.
Step 5 – Performing a benchmarking study
The purpose of the benchmarking study is virtually to test whether the profitability within each intra-group transaction is similar to the profitability that totally independent companies with similar functional profile (functions, risks and assets) are earning.
Every external benchmarking study has to be prepared using a database but before using such database, the functional analysis and economic analysis have to be prepared in order to actually know what filters to use and what to actually look for into the potential comparables.
Mind the mistakes that can be done in preparing a benchmarking study. Beyond using a good transfer pricing template / example documentation following an exceptional process, be highly aware at all times that the benchmarking studies are the “heart and soul” of the transfer pricing documentation.
Therefore, it is highly advisable to avoid at any cost any kind of mistake in preparing the benchmarking study / studies for your transfer pricing documentation.
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