Generally, U.S. regulations do not prescribe a standard report format for transfer pricing documentation. However, the IRS expects documentation to clearly explain how transfer prices were determined and why they satisfy the arm’s length standard.
According to the IRS, a comprehensive transfer pricing report generally includes the following:
The documentation should describe the multinational group’s business overview. This generally includes business, industry, organizational structure, and the role of each related entity involved in the controlled transactions. This provides the background necessary to understand how the business operates and how profits are generated.
The report should identify each material related-party transaction. Such transactions may include the following:
The documentation should also identify the parties involved, the value of each transaction, and the commercial purpose of the arrangement.
A functional analysis evaluates the contribution of each party to the controlled transaction by examining:
This analysis helps identify the tested party and forms the basis for selecting the most appropriate transfer pricing method.
The documentation should explain why the selected transfer pricing method provides the most reliable measure of an arm’s length result under the facts and circumstances.
Unlike the OECD Guidelines, which refer to the most appropriate method, U.S. regulations apply the Best Method Rule. Taxpayers should explain why the selected method was chosen and discuss any reasonable alternative methods that were considered but rejected.
The economic analysis demonstrates whether the transfer prices are consistent with those that would have been agreed upon by independent parties.
This section typically includes:
Benchmarking studies should be reviewed periodically because comparable company data and market conditions change over time.
The documentation should include sufficient financial information to support the economic analysis.
Where applicable, taxpayers should provide:
The IRS encourages taxpayers to present financial data in a format that allows examiners to easily understand and verify the calculations.
Transfer pricing documentation should also include documents supporting the analysis, such as:
The IRS expects these documents to be consistent with the company’s actual business practices.
In addition to the principal documents described in the regulations, the IRS recommends including information that helps examiners understand the analysis more efficiently.
Useful supporting information includes:
Although these additional materials are not mandatory, they often streamline the audit process and may reduce the scope of IRS inquiries.