Transfer pricing documentation

What it means

Transfer pricing documentation is the written file with which a taxpayer demonstrates that prices in transactions with related parties meet the arm’s length principle. Its scope - abbreviated, basic or full - depends on the taxpayer’s size and the volume of transactions.

It describes the group and its activities, lists the controlled transactions, sets out a functional and risk analysis, and states the pricing method chosen with its justification, including a comparability study where required.

The documentation does not approve a price, it only justifies it. It is evidence of how transfer pricing was carried out, not a substitute for it: the tax administrator can reject it, choose another method or other comparable companies and arrive at a different price. The more precisely it describes the real functions and risks, the harder such a conclusion is to sustain.

How it works in practice

The file is not filed automatically - it is prepared for the tax period and produced on the tax administrator’s request within a short deadline. So it is maintained during the year, not assembled when the request arrives.

In practice it covers the same transactions eliminated in consolidation: intra-group services, licences, loans, management fees and goods supplied between affiliated companies.

For clients with several companies under one owner we keep a list of the contracts between them - premises rent, loans, licence fees and services - and note for each how the price was arrived at. When a request comes, the documentation is assembled from that list within the deadline, without digging through old emails and spreadsheets.

What to watch out for

Missing or box-ticking documentation gives a tax audit grounds to adjust the tax base on the administrator’s own estimate, and the burden of proof sits with the taxpayer. The commonest finding is management fees with no evidence of a service actually rendered or of its benefit.

Documentation written after the fact from a template often describes the functions differently from what the contracts and invoices show: the text has the parent bearing the risk, the contracts the subsidiary. In an audit the actual conduct prevails, and a buyer doing due diligence later finds the same contradiction and reflects it in the price.