Transfer pricing prejudices
1. "We only have two or three transactions with related parties. How hard can it be to prepare the transfer pricing documentation file?"
First of all, anyone should know that documenting a transaction from a transfer pricing perspective is not subject to common audit practice where you verify, for example, the correct registration of an invoice. You need to argue that the price of an intra-group transaction is arm’s length (i.e. at market level) and this process is not an exact science.
In order to justify the arm's length nature of an intra-group transaction certain steps must be completed: (i) analyse and understand the industry and the group's activity, (ii) analyse and understand the local company's activity, (iii) prepare a functional analysis with the aim of identifying the functions performed, risks assumed and assets employed by each related party in relation to the intra-group transaction, (iv) analyse the existing documents (e.g. contracts, invoices, activity reports, etc.) backing up the transaction and (v) assess the arm’s length nature of the transaction by selecting the appropriate transfer pricing method and applying it (this also includes performing benchmarking studies that require access to different type of databases). Therefore, the documentation process of an intra-group transaction is a complex one that requires time and resources.
2. "The transfer pricing documentation file can change the past"
A common misunderstanding is that by preparing a transfer pricing documentation file for transactions which already took place (which may or may not be arm’s length) will solve any issues related to these transactions.
Any taxpayer should be aware that the transfer pricing documentation file analyzes intra-group transactions that have already taken place. What a consultant can do is try to identify and quantify the factors justifying any deviations from the market practice and thus reduce (or even eliminate in certain cases) the adjustments that can be imposed by the tax authorities.
Things are totally different when the company implements a transfer pricing policy which is thoroughly applied since the moment the intra-group transaction is carried out. This transfer pricing policy, together with a well documented and updated transfer pricing documentation file will be proof that the taxpayer addresses the transfer pricing topic with seriousness. To some extent, this thorough documentation could be a good reason to “discourage” tax authorities to even investigate the transfer prices applied by the taxpayer.
3. "The penalty for not preparing the transfer pricing documentation file is a simple fine"
In fact, the “real penalty” for not preparing and submitting the file is that the tax authorities have the right to impose transfer pricing adjustments. From our practical experience, these adjustments can be performed without a thorough analysis and documentation process and do not take into account any specific circumstances of the taxpayer. Therefore, at this stage, you no longer have control on the adjusting mechanism used by the tax authorities, nor have the right to challenge it. Apart from this, "real penalty" may also be potential tax audit by tax authorities in all other tax areas.
4. "We are working with someone who has access to a database; this way is cheaper"
At first glance, it could be cheaper. However, if you take into consideration the results, you will certainly experience what a transfer pricing adjustment means.
Our advice is to work only with a company that has a licence for the databases you need (granting continuous access to these databases). Why? The databases are updated periodically; thus, during a tax inspection that will take place, for example, in 2014 you need to prove the data you used when preparing the transfer pricing documentation file (let’s say 2013). This can be done only if the company you work with has a licensed database.
Moreover, using in the transfer pricing documentation file a hacked database could harm the image of the company and of the group.
5. "We are part of a strong multinational group of companies; the tax authorities will not risk challenging us especially on a sophisticated area such as transfer pricing"
The transfer pricing audit teams are constantly being trained in order to meet the challenges in this field. Generally, these trainings are lectured by highly qualified transfer pricing professionals. So our advice is not to rely on the “lack of training” of the tax inspectors.
Also, we recommend you not to rely on the “protection” resulting from the renown of the group. Powerful fiscal administrations, like those from USA or UK are already engaged in battles on transfer pricing field with big corporations (such as Google or Starbucks). In the current economic conditions, when more resources to the state budget are needed, it will not be long until the local tax authorities will follow these ”exemples”.
6. "In a transfer pricing audit we will get help from the headquarter; they already have prepared the transfer pricing documentation file"
From our experience, the solution to translate the transfer pricing documentation file prepared for the headquarter is not feasible. Each transfer pricing analysis should take into account the relevant market conditions of the taxpayer under inspection (it is not the group that is being investigated, it is the local company). Moreover, specific local requirements must be met.
You should note that, no matter how good the communication with the headquarter is, during the transfer pricing inspection is practically impossible to quickly receive all the information needed for the local transfer pricing documentation file, especially if the data is related to transactions carried out years ago. In addition, the confidentiality issue arises – you can contact only certain co-workers from the headquarter who are not available “all the time” or in order to provide the data you need from them a special approval must be first granted by a different person. The conclusion? Start preparing the transfer pricing documentation file in advance!
7. "National groups of companies are immune to transfer pricing investigations by comparison to the multinational ones"
The law does not distinguish the requirement for preparing the transfer pricing documentation file between the local or multinational coverage of the group. Regardless of the size, the taxpayer must not distort the financial results through intra-group transactions or artificial transactions. At the same time, the tax authorities from an European country must prove that they do not infringe the principle of non-discrimination between national and multinational groups.
8. "I already have a transfer pricing file. Why do I need to update it?"
First of all, transfer pricing documentation should reflect any major event within the group (acquisitions, restructurings, etc.). But even in the absence of such internal events it is mandatory to examine whether there were no substantial changes in the market / industry your company operates in, at regional level: maybe a merger or insolvency (very common events for this "fluid" period) led to market distortions which were unknown two years ago, or even a few months ago.
Transfer pricing documentation must prove at any given time that the intra-group transactions are not out of touch with reality. Not to mention the legislative changes that always bring "something new".