Transfer Pricing Documentation
Keeping tax documentation of transfer pricing is a legal and formal requirement resulting from tax law regulations.
It concern transactions between affiliated entities or between entities whose seat or management board is located on the territory or in a country applying harmful tax competition (tax havens), whose value exceeds the limits specified in regulations.
Why is it worth preparing tax documentation?
Keeping an optimal version of tax documentation of transfer pricing secures the obligation to keep documentation and minimizes:
- the risk of estimating the income and questioning tax deductible expenses
- the risk of applying the 50% penalty income tax rate
- the risk of VAT adjustment
- the risk of tax interests
- the penal and tax risk resting on members of a management board or persons performing management functions.
Systematic keeping of transfer pricing documentation allows to:
- increase the tax security of transactions and limit the risks
- collect evidence confirming market–related character of transactions
- present all circumstances having influence on the conclusion of transactions and on the amount of remuneration
- fulfil additional statutory requirements
Content of tax documentation of transfer pricing
Tax documentation is a collection of information concerning transactions. It comprises the description of the object and the role of the entities participating in the transaction, the policy implemented and the method of price determination. It has to:
- determine functions fulfilled by the entities participating in the transaction (with consideration for the assets used and the risk taken),
- determine all anticipated costs related to the transaction as well as specify the method and the date of payment,
- specify the method and manner of profit calculation and the price of the object of the transaction,
- specify the economic policy and other actions within its scope – in the event when the policy applied by the entity has influenced the value of the transaction,
- indicate other factors – in a situation when – in order to specify the value of the object of the transaction – these factors have been taken into account by the entities participating in the transaction,
- specify the expected benefits from services – applicable to contracts concerning the performance of intangible services.
The experience gained over the years allowed us to prepare several versions of documentation tailored to clients’ needs, with the purpose to fulfil the obligation to keep documentation.
Each Client may choose a version satisfying his needs from both the factual and financial angle.
It should be borne in mind that the documentation has to describe the actual state of transactions and account for all factors and circumstances which could have had any influence. Therefore, it has to be updated each time the transaction conditions described in such documentation change.
In order to limit to a maximum extent the risk related to transfer pricing we recommend to supplement the documentation with an additional element (not required by tax regulations) – comparability analysis.
We will be pleased to provide detailed information concerning the obligation to keep documentation. You are welcome to contact us .
Dawid Michalak, PhD
Partner in DMS TAX