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.
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.
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.
The best way to protect yourself from the problems and penalties mentioned previously is to follow these best practices:
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.