Transfer pricing documentation is an essential tool to mitigate the risks of transfer pricing audits and disputes. It is crucial to prepare it correctly to avoid potential penalties, interest charges, and reputational damage. But even though companies invest heavily in transfer pricing documentation, they still make mistakes that can have costly consequences. In this blog post, we discuss the top four mistakes when preparing transfer pricing documentation and how to avoid them.
- Not telling the story and explaining how it corresponds to the transfer pricing policy
Transfer pricing documentation should not be a collection of unrelated facts and data points. It should tell a story explaining how the company’s transfer pricing policy aligns with the group’s overall business strategy. It should demonstrate that the company has analysed the functions performed, risks assumed, and assets used in the intercompany transactions and applied an appropriate transfer pricing methodology.
A common mistake is to have a misalignment between your TP documentation, business strategy and/or TP policy. For example, your key value drivers should make sense in relation to your TP policy. To avoid this mistake, the documentation should lead the reader to the conclusion that the TP policy is a logical consequence of how the business operates.
- Including irrelevant information
Another common mistake when preparing transfer pricing documentation is to include all kinds of irrelevant information. This not only increases the cost of preparing the documentation but also the cost of updating it annually.
Documentation should focus on the relevant facts, story and data points that support the company’s transfer pricing policy and are required for compliance purposes. Irrelevant information adds unnecessary clutter and distracts from the critical facts that support the transfer pricing policy.
- Using marketing texts and big words when not appropriate
When preparing transfer pricing documentation, it is essential to use clear and concise language appropriate to the intended audience and end-goals. For example, using marketing texts or big words may give the impression that the respective group/entity should be highly profitable, when in reality it may be struggling. Furthermore, a tax auditor may pick a particular phrase to use in an audit.
To avoid this mistake, companies should ensure that the language used in the transfer pricing documentation is clear, concise and appropriate for the intended audience.
- Forgetting to consider all stakeholders
When preparing transfer pricing documentation, it is essential to consider all stakeholders. Each stakeholder may have a different objective. Companies should ensure that the transfer pricing documentation takes into account all objectives is suitable for the intended audience.
In short, preparing transfer pricing documentation is an essential task for multinational companies. To avoid costly mistakes, companies should focus on the narrative of the transfer pricing documentation and ensure that the story is consistent with the business strategy and your transfer pricing policy is concisely worded.
If you would like to know more about these mistakes and how to avoid them, please feel free to contact us at hello@quanteraglobal.com or schedule an introductory call.