Introduction
Transfer Pricing documentation is crucial to ensure compliance with international tax regulations. Conversely, many companies make mistakes that can lead to significant penalties. Herein, we will address the most frequent mistakes and how to avoid them to maintain compliance and reduce risks.
Inconsistent or Incomplete Information
One of the most common documentation errors is providing inconsistent or incomplete information in the different levels of Transfer Pricing reporting, such as the Local Report, Master File, and Country by Country Report. Companies will ensure that the documentation covers relevant aspects, including the methodology employed to determine Transfer Pricing and supporting documentation of the functions, assets, and risks involved in a transaction, depending on the request. Otherwise, tax authorities may question transactions and apply various adjustments or penalties.
Lack of Comparability Analysis
Another common mistake in Transfer Pricing documentation is the lack of a solid comparability analysis to support the applied methods and Transfer Pricing results. The comparability analysis consists of identifying those independent third-party transactions that can serve as a reference for your intercompany transactions. Otherwise, it may not be possible to justify compliance with the Arm’s Length Principle to the tax authorities in an eventual audit process.
Failure to Update Supporting Documentation
A third usual error in Transfer Pricing documentation is the inconsistency with reality. For example, the scope for rendering service may differ from the activities and/or functions already performed by the persons in charge of rendering such service. Thus, companies should ensure that their intercompany transactions are properly documented and aligned with reality to avoid discrepancies that may generate suspicions or audits. Keeping information up to date is essential to comply with tax requirements.
Underestimating the Comparative Analysis Significance
Comparative analysis is a central element in Transfer Pricing documentation, demonstrating that transactions are at market value. Otherwise, such as relying on incorrect data can lead to adjustments by the tax authorities. Ensuring that comparative analyses are accurate and well-documented is crucial to avoid problems.
Missing deadlines
The last common mistake in Transfer Pricing documentation is missing deadlines for filing and reviewing documentation. Several jurisdictions may have different deadlines and procedures for filing and disclosing your Transfer Pricing documentation. Some countries may require you to file documentation when necessary, while others may require you to file annually or within a specified period after a fiscal year. In this regard, Companies should track the deadlines in each jurisdiction and plan their documentation process accordingly.
Call to Action:
Would you like to ensure your Transfer Pricing documentation complies with current regulations? At TPC Group, we have a team of experts to assist you in avoiding these frequent mistakes and keeping your company tax-compliant. Contact us today for customized advice.
Source: This article is based on the experience of TPC Group's Transfer Pricing experts, who have years of experience in tax consulting and compliance
