Good transfer pricing documentation should clearly explain how related-party prices were determined and why they are consistent with the arm’s-length principle. For U.S. companies and foreign companies with U.S. operations, following a few basic practices can make the documentation more reliable and easier to defend if the IRS reviews it.
The following are some of the best practices one may following while preparing transfer pricing documentation in the United States.
Make sure the information about intercompany transactions is consistent across your transfer pricing documents.
For multinational groups that prepare a Master File, Local File, or Country-by-Country Report (CbCR) for other countries, the information should not conflict with the company’s U.S. transfer pricing documentation.
For example, the companies involved, transaction amounts, functions performed, and transfer pricing policies should generally be consistent in all kinds of documentation.
Transfer pricing documentation should reflect the company’s current business operations and transactions.
Update the documentation when there are significant changes, such as the following:
Keeping documentation current is particularly important because U.S. penalty protection generally depends on having appropriate documentation prepared on a timely basis.
A good transfer pricing analysis should explain the functions performed, assets used, and risks assumed by each company involved in the transaction.
This helps explain why a particular transfer pricing method and price are appropriate.
For example, if a U.S. company acts as a distributor for its foreign parent, the documentation should explain what the U.S. company does, what assets it uses, and which business risks it assumes.
Transfer pricing conclusions should be based on accurate, complete, and reliable financial and business information.
For benchmarking and economic analysis, companies should use appropriate and reliable data and clearly explain how the data was selected and used.
Incomplete or inaccurate information can weaken the company’s transfer pricing position and make it more difficult to defend during an IRS examination.
Companies should maintain the documents used to support their transfer pricing analysis, such as:
Following these practices can help U.S. companies and multinational groups better support their transfer pricing positions, reduce the risk of penalties, and respond more effectively if the IRS examines their related-party transactions.
Next, let’s examine some of the transfer pricing documentation challenges that companies often face in the United States.