Contemporaneous Documentation & Transfer Pricing
Posted on: January 13, 2020
Along with filing tax returns and closing the books, preparing transfer pricing documentation is an annual process required for companies doing business internationally. In addition to the myriad rules and regulations associated with transfer pricing, many countries have specific requirements regarding “contemporaneous” documentation that must be followed. In this article, we’ll explain what contemporaneous documentation is, and offer some best practices for keeping and maintaining this information effectively.
What is contemporaneous documentation?
To show that a company’s related party transactions have been conducted at arm’s length, contemporaneous documentation is documentation that supports your current transfer pricing policies. It is “contemporaneous” because it must be prepared by a certain date—usually simultaneously with annual tax returns. (Tweet this!) So while your tax return serves to document company income and expenses (and more) for the year, contemporaneous documentation comprises specific information that proves the company’s transfer pricing was conducted at arm’s length during the year. Its purpose is to prove to tax authorities that the company’s policies produced results that are consistent with the relevant regulations.
What are the risks of not providing contemporaneous documentation?
The concept of contemporaneous documentation is present in the transfer pricing guidelines of most countries, though the requirements vary from place to place. For example, in Germany, only “extraordinary” transactions must be documented contemporaneously.
Some countries may not require you to file contemporaneously with tax filing, but not doing so may leave you more open to penalties. For example, Poland requires organizations to submit transfer pricing documentation at the time you submit your tax return; if you don’t comply with this expectation you risk incurring a hefty fine.
In the U.S., contemporaneous documentation may provide some protection against penalties. For example, should the IRS conduct an audit and discover a problem with your transfer pricing, a lack of contemporaneous documentation means the IRS may impose penalties in addition to any necessary adjustments. If you do have contemporaneous documentation, however, the penalties may not be applicable.
Another issue that could arise relates to the burden of proof in cases of wrongdoing. In some countries, the burden of proof is on the tax authority to prove your transfer pricing is wrong. Without contemporaneous documentation in place, the burden of proof may fall on you to prove that your transfer pricing policy is correct.
Best Practices For Contemporaneous Documentation
The best way to protect yourself from the problems and penalties mentioned previously is to follow these best practices:
- Know the transfer pricing rules in every country in which you conduct business. Rules regarding transfer pricing are changing fairly frequently these days. For example, new requirements for Poland went into effect relatively recently, for 2017 tax returns. It’s important to stay current regarding when to file documentation, and whether or not countries have made specific updates to their policy.
- Plan in advance. Tax law, especially across different jurisdictions, can be complicated. And even though your U.S. tax return may not be due right away, other countries have different deadlines and different information requirements. The best way to avoid problems is to start preparing your documentation early in the year—even as early as the middle of January, at the same time you close your books.
- Remain consistent across your jurisdictions. Whereas in the past it might have gone unnoticed if a company prepared transfer pricing documentation differently in different countries, the same strategy would be risky today. Instead, assume that tax authorities from different countries will request tax information from other countries, which means it’s imperative to keep your message the same across all your transfer pricing reports.
- Review your documentation each year. You don’t need to reinvent the wheel every year. You do, however, have to review your transfer pricing documentation annually to make sure it’s up to date, and that it still accurately describes the current year’s facts and requirements. By all means, leverage whatever you can from work you’ve done in prior years.
- Have a single, centralized point of contact. Since there are so many different moving parts with regard to transfer pricing, keep things simple where you can. Preparing your documentation using multiple providers and/or consultants in different countries can lead to inconsistencies. Try to maintain a single, centralized point of contact both within the company and with your service provider to make sure your documentation is accurate across the board.
Put Your Transfer Pricing Documentation In Expert Hands
At Valentiam Group, developing innovative solutions to transfer pricing documentation challenges is our specialty. Our senior professionals have worked successfully with hundreds of discerning clients, many of whom are Fortune 500 companies. If you’re looking for expert advice regarding transfer pricing compliance, or need assistance preparing and maintaining your company’s contemporaneous transfer pricing documentation, schedule a discovery call with us today.
These best practices are essential for meeting global transfer pricing documentation requirements. Is your company following them?
The Unified Approach is a radical departure from the existing system, in that it overlays formulary apportionment on top of the arm's length principle.