Transfer Pricing Insider

Vol. 1, No. 2

Tips and Tricks

By Mimi Song, Group Senior Manager, Transfer Pricing

As the saying goes, transfer pricing is an art, not a science. However, you don't necessarily have to be an artist to address your transfer pricing documentation requirements globally. Here are some tips for increasing your transfer pricing awareness:

Understand your transfer pricing exposure
Many jurisdictions are notorious for aggressively pursuing transfer pricing issues. If you have transfer pricing issues in countries such as the United States, Canada, France, Germany, Ireland, the United Kingdom or Hungary1, you will most likely need to have your documentation and analyses prepared in compliance with the regulations of the respective jurisdictions. You should also consider the extent of your exposure based upon the dollar values of your inter-company transactions. Penalties for lack of appropriate documentation range from 0% to over 200% plus interest, depending upon your country of operation. You should contact your CrossBorder economist to discuss the possibility of preparing a transfer pricing exposure analysis.

Choosing the right method
Most countries have adopted transfer pricing methods based on the OECD guidelines. These methods include transaction-based analyses and profit-based analyses, such as:

Transaction-based analyses
  • Comparable Uncontrolled Price Method (CUP)
  • Cost Plus Method (CP)2
  • Resale Price Method (RSP)
Profit-based analyses
  • Profit Split Method (PSM)3
  • Transactional Net Margin Method (TNMM)

Certain countries have a hierarchy of methods, which typically means that a transaction-based analysis is preferred over a profit-based analysis. However, the choice of the best or most appropriate method is based on several different factors, including the existence of internal or external uncontrolled transactions, reliability of third party data and reliability of internal financial information. Transaction-based analyses have very stringent comparability requirements, which make it virtually impossible to find comparable uncontrolled transactions. The analysis, regardless of the method you select, should be prepared considering each of the different potential methods. To ensure that the method you ultimately select is appropriate, you should have the first year of documentation prepared by an outside transfer pricing firm, such as CrossBorder. It is imperative that you get it right the first time around since this documentation will be used to establish your transfer pricing for the following year.

Don't re-invent the wheel
Preparing your contemporaneous transfer pricing documentation annually is a requirement of most tax jurisdictions with specific regulations. However, preparing the documents using an external service provider year after year can present a significant cost to your organization. The documents that are required to comply with international transfer pricing rules do not change significantly from year to year. As long as the facts and circumstances surrounding your inter-company transaction have not changed, you should consider bringing the process of updating the documentation in-house. By utilizing the CrossBorder Compliance software tool, you do not have to go through the entire process of gathering information and establishing benchmarks from scratch. The software enables you to update your transfer pricing study with 50% less effort than if you were to engage a transfer pricing services firm to create new documentation, and for a fraction of the cost.

CrossBorder Compliance Tips and Tricks
The tools in the upper left corner of most CrossBorder Compliance windows are often overlooked. However, there are many features available in the toolbar that you should take advantage of.

The Copy Doc tool enables you to copy the documentation from one entity to another entity within the same study file.

Replace Template - This command enables you to replace the current documentation with another template from the documentation library.
Make Template - Use this command to create a template in the documentation library using the information from the entity whose information you’re viewing.

You can use the question On-The-Fly commands to add, modify, delete or re-order the questions that appear in CrossBorder Compliance documentation windows. The ability to modify questions is very useful since question headers appear in reports in boldface type and therefore contribute to their formatting and focus.

You can use the topic On-The-Fly commands to add, modify or delete topics. In CrossBorder Compliance, topics are the major categories of documentation questions that appear on selection buttons.

 Spelling - Use this command to check the spelling of text in the active field.

If you can't locate a certain aspect of CrossBorder Compliance functionality, always check the toolbar in the upper left corner of the window. Depending upon the window you’re viewing, the toolbar can contain other features in addition to those described here.
Footnotes
1 Please note that the list of countries only provides snap shot of the countries that are currently pursuing transfer pricing compliance.  It is not a comprehensive list. 
2 The CP and RSP can also be applied as a profit-based analysis.
3 The PSM can also be applied as a transactional-based analysis. 

Transfer Pricing Insider, Vol. 1, No. 2
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