International Taxation of Banking by Unknown

Author:Unknown
Language: eng
Format: epub
Published: 2021-06-19T16:00:00+00:00

§20.08 TRANSFER PRICING DOCUMENTATION AND AUDITS

[A] Documentation Requirements

Most transfer pricing provisions and related rulings set out the documentation that must be prepared and retained by taxpayers. Increasingly, this documentation must be prepared and updated in each tax year, and not in response to a transfer pricing audit. An example of the detailed documentation requirements is provided under the related United States regulations,68 which require the following:

– An overview of the taxpayer’s business, including an analysis of the economic factors that affect the pricing of its products and services.

– The taxpayer’s organisation structure is covering all parties relevant to the related party transactions at issue.

– Documentation required by regulations.

– The transfer pricing method selected and an explanation of why that method was selected.

– The alternate transfer pricing methods which were considered, and why they were not selected.

– A description of the controlled transactions evaluated and any internal data used to analyse those transactions.

– What comparables were utilised in the analysis, how their comparability was evaluated, and a detailed description of any adjustments to the comparable prices.

– An explanation of the economic analysis and projections which were relied on in the process of developing the transfer pricing methodology.

– Any relevant data which was obtained after the end of the taxable year and before filing the return.

– An index of the related documents and a description of the record keeping system.

[B] Audit Selection

A threshold issue is whether companies may be selected for transfer pricing audits. The tax authorities may accept that companies have satisfactory current documentation which supports the use of arm’s length pricing and, therefore, not conduct a tax audit. This can take place where the tax authorities are updated by the taxpayer on methods used to improve their tax compliance, including their commitment to arm’s length transfer pricing. The indicators for possible transfer pricing audits which may be used by tax authorities may include abnormally low profits, transactions with low tax regimes, cross-border business restructures, and any significant legal or economic transfers of intangible property.

If an audit is commenced, it is advisable for the company concerned to assemble the available information, determine if satisfactory documentation exists, and determine which prices can be supported as made at arm’s length. Management support is an essential requirement in this process to ensure a coordinated response, and this process also requires cooperation from other companies in the group. This process also requires contact procedures for liaising with the tax authorities to ensure that they are provided with correct information.

It may be an advisable practice to resolve other tax matters where possible, such as tax issues relating to prior year tax returns. In the event that additional tax is considered a likely outcome of the audit, consideration may potentially be given to agreeing to make related tax payments to reduce penalties and related interest charges. There may also be an opportunity to reach a settlement on a positive basis which establishes the approaches for future transfer pricing in the group.

Following the audit, the company concerned may need to determine whether future prices should be adjusted due to the tax audit result.

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