When entering into intercompany transactions, Transfer Pricing documentation is always important. The intercompany prices must be at arm’s length, and be substantiated. The compliance challenges do not end here. During the BEPS-project the OECD stated the importance of rules regarding transfer pricing documentation in order to enhance transparency for tax administrations. To make sure that the governments would receive enough information, a three-tiered standardised approach was to be taken. In this approach, known as Action 13, the Master File, Local File and Country-by-Country Reporting were the three pillars to achieve the initial goal.
The OECD stated in Action 13 that it was important that countries took the compliance cost for companies into account. It however remains a challenge to be fully compliant and stay within a reasonable budget. Therefore, a cost-benefit analysis and compliance strategy are recommended. This blog presents you some attention points in this regard.
Although the OECD has provided tax administrations guidance regarding the implementation of Action 13, there are still noticeable differences. This can for example be seen in Master and Local File requirements that differ between countries. The language of these reports, the amount of time a company is given and the height of fines in case of non-compliance can vary substantially among countries.
Although many tax authorities are willing to accept the files in the English language, sometimes the tax inspector has the right to ask for a translation (e.g. France, Japan, Spain). In Poland the Local File must even be reported in Polish. There is also a difference in the time that is given to prepare the reports. Sometimes the files must be submitted with the tax return of the same fiscal year, and other times the files must be ready within a few days of request. The amount of time that is given in the latter case can vary from 60 days (e.g. Germany, Finland); 3 days (Hungary); to even immediately upon request (Netherlands). These different terms are relevant when judging the risk of preparing the filing requirements.
Fines for non-compliance regarding these documentation requirements can be severe. When these requirements have not been met, the fines can vary from 3,000 GBP (UK), to 100,000 EUR (France) and even up to 830,000 EUR (Netherlands). Another consequence that a company can be confronted with is the reversal of the burden of proof.
The other side of the coin is that full-on compliance with all local regulations is quite costly and leads to substantial annual update work as well. When keeping this in mind, a cost-benefit-analysis can be useful. For such an analysis it is important to:
- determine your general tax risk strategy,
- determine the level of compliance you wish to obtain (i.e. material vs. formal compliance),
- determine what type of documentation process suits your company,
- and to create a priority list.
The differences in rules between countries thus are crucial factors to consider. The steps to come to a compliance strategy can be read in one of our blogs we have written on this subject.
In regard to this analysis it is also important to keep a note of the changes in compliance requirements for the countries that your company is operating in. For example, Germany released a draft tax law with the intention of implementing significant changes in order to address the growing importance of transfer pricing. In this draft, for example the minimum requirements for filing a Master File and the submittal date have become stricter.
Banks and auditors
One important note is that these documentation rules are not only relevant in the relation between your company and the tax authorities. In previous blogs we noted that banks and auditors have recently been taking interest in the substantiation of your transfer prices. This means that documentation that is not in order can have far stretching consequences.
QG Academy – Webinar
In the upcoming QG Academy on March 18th our specialists Richard Slimmen and Maikel Verhoeven will dig deeper into this subject. During this session insights are provided on how to deal with the compliance burden effectively and organise the management of this burden in your organisation. In relation hereto, choices we see in practice are discussed as well as more general risk management elements. IMPORTANT NOTICE: to limit the risk of transferring the Coronavirus (COVID-19), this Academy will be held as a webinar instead of a physical meeting.
Interested? You can register here.
Our core business is providing Transfer Pricing solutions that meet your requirements and needs. We can always offer you a perfect solution, regardless whether you just do not have the time, budget or resources to comply with extensive documentation requirements. Either you prepare the transfer pricing documentation yourself with our support or we can prepare it for you.
We offer a number of menus for the preparation of transfer pricing documentation. Please find an overview of our Menus here .
If you would like to personally discuss your compliance strategy or requirements, please get in touch with us via info@quanteraglobal and we will direct you to the relevant professional.