Three objectives of transfer pricing documentation are: to ensure that taxpayers give appropriate consideration to transfer pricing requirements in establishing prices and other conditions for transactions between associated enterprises and in reporting the income derived from such transactions in their tax returns; to provide tax administrations with the information necessary to conduct an informed transfer pricing risk assessment; and to provide tax administrations with useful information to employ in conducting an appropriately thorough audit of the transfer pricing practices of entities subject to tax in their jurisdiction, although it may be necessary to supplement the documentation with additional information as the audit progresses ...

While the transactional profit split method can be applied in cases where there are no uncontrolled comparables, information from transactions between independent parties may still be relevant to the application of the method, for example to guide the splitting of relevant profits (see Section C.3.1.1), or where a residual analysis approach is used (see Section C.3.1.2) ...

It is not possible to provide specific rules that will cover every case. Tax administrators should hesitate from making minor or marginal adjustments. In general, the parties should attempt to reach a reasonable accommodation keeping in mind the imprecision of the various methods and the preference for higher degrees of comparability and a more direct and closer relationship to the transaction. It should not be the case that useful information, such as might be drawn from uncontrolled transactions that are not identical to the controlled transactions, should be dismissed simply because some rigid standard of comparability is not fully met. Similarly, evidence from enterprises engaged in controlled transactions with associated enterprises may be useful in understanding the transaction under review or as a pointer to further investigation. Further, any method should be permitted where its application is agreeable to the members of the MNE group involved with the transaction or transactions to which the methodology applies and also to the tax administrations in the jurisdictions of all those members ...

The arm’s length principle is applied, broadly speaking, by many customs administrations as a principle of comparison between the value attributable to goods imported by associated enterprises, which may be affected by the special relationship between them, and the value for similar goods imported by independent enterprises. Valuation methods for customs purposes however may not be aligned with the OECD’s recognised transfer pricing methods. That being said, customs valuations may be useful to tax administrations in evaluating the arm’s length character of a controlled transaction transfer price and vice versa. In particular, customs officials may have contemporaneous information regarding the transaction that could be relevant for transfer pricing purposes, especially if prepared by the taxpayer, while tax authorities may have transfer pricing documentation which provides detailed information on the circumstances of the transaction ...

While the transactional profit split method can be applied in cases where there are no uncontrolled comparables, information from transactions between independent parties may still be relevant to the application of the method, for example to guide the splitting of relevant profits (see section C.3.1.1), or where a residual analysis approach is used (see section C.3.1.2) ...

Three objectives of transfer pricing documentation are: to ensure that taxpayers give appropriate consideration to transfer pricing requirements in establishing prices and other conditions for transactions between associated enterprises and in reporting the income derived from such transactions in their tax returns; to provide tax administrations with the information necessary to conduct an informed transfer pricing risk assessment; and to provide tax administrations with useful information to employ in conducting an appropriately thorough audit of the transfer pricing practices of entities subject to tax in their jurisdiction, although it may be necessary to supplement the documentation with additional information as the audit progresses ...

It is not possible to provide specific rules that will cover every case. Tax administrators should hesitate from making minor or marginal adjustments. In general, the parties should attempt to reach a reasonable accommodation keeping in mind the imprecision of the various methods and the preference for higher degrees of comparability and a more direct and closer relationship to the transaction. It should not be the case that useful information, such as might be drawn from uncontrolled transactions that are not identical to the controlled transactions, should be dismissed simply because some rigid standard of comparability is not fully met. Similarly, evidence from enterprises engaged in controlled transactions with associated enterprises may be useful in understanding the transaction under review or as a pointer to further investigation. Further, any method should be permitted where its application is agreeable to the members of the MNE group involved with the transaction or transactions to which the methodology applies and also to the tax administrations in the jurisdictions of all those members ...

The arm’s length principle is applied, broadly speaking, by many customs administrations as a principle of comparison between the value attributable to goods imported by associated enterprises, which may be affected by the special relationship between them, and the value for similar goods imported by independent enterprises. Valuation methods for customs purposes however may not be aligned with the OECD’s recognised transfer pricing methods. That being said, customs valuations may be useful to tax administrations in evaluating the arm’s length character of a controlled transaction transfer price and vice versa. In particular, customs officials may have contemporaneous information regarding the transaction that could be relevant for transfer pricing purposes, especially if prepared by the taxpayer, while tax authorities may have transfer pricing documentation which provides detailed information on the circumstances of the transaction ...

Documents also may be helpful for showing the process of negotiations for determining or revising prices in controlled transactions. When taxpayers negotiate to establish or to revise a price with associated enterprises, documents may be helpful that forecast profit and administrative and selling expenses to be incurred by foreign subsidiaries such as personnel, depreciation, marketing, distribution, or transportation expenses, and that explain how transfer prices are determined; for example, by deducting gross margins for subsidiaries from the estimated sales prices to end-users ...

Some relevant financial information might also be in the possession of the foreign associated enterprise. This information could include reports on manufacturing costs, costs of research and development, and/or general and administrative expenses ...

Financial information may also be useful if there is a need to compare profit and loss between the associated enterprises with which the taxpayer has transactions subject to the transfer pricing rules. This information might include documents that explain the profit and loss to the extent necessary to evaluate the appropriateness of the transfer pricing policy within an MNE group. It also could include documents concerning expenses borne by foreign associated enterprises, such as sales promotion expenses or advertising expenses ...

The possible risks assumed that are taken into account in the functional analysis may include risks of change in cost, price, or stock, risks relating to success or failure of research and development, financial risks including change in the foreign exchange and interest rates, risks of lending and payment terms, risks for manufacturing liability, business risk related to ownership of assets, or facilities ...

Information about functions performed (taking into account assets used and risks assumed) may be useful for the functional analysis that ordinarily would be undertaken to apply the arm’s length principle. The functions include manufacturing, assemblage, management of purchase and materials, marketing, wholesale, stock control, warranty administration, advertising and marketing activities, carriage and warehousing activities, lending and payment terms, training, and personnel ...

General commercial and industry conditions affecting the taxpayer also may be relevant. Relevant information could include information explaining the current business environment and its forecasted changes; and how forecasted incidents influence the taxpayer’s industry, market scale, competitive conditions, regulatory framework, technological progress, and foreign exchange market ...

Other special circumstances could involve management strategy or the type of business. Examples are circumstances under which the taxpayer’s business is conducted in order to enter a new market, to increase share in an existing market, to introduce new products into a market, or to fend off increasing competition ...

Special circumstances would include details concerning any set- off transactions that have an effect on determining the arm’s length price. In such a case, documents are useful to help describe the relevant facts, the qualitative connection between the transactions, and the quantification of the set-off. Contemporaneous documentation helps minimise the use of hindsight. As discussed in Chapter III, a set-off transaction may occur, for example, where the seller supplies goods at a lower price, because the buyer provides services to the seller free of charge; where a higher royalty is established to compensate for an intentionally lower price of goods; and where a royalty-free cross-licence agreement is concluded concerning the use of industrial property or technical know-how ...

Information on pricing, including business strategies and special circumstances at issue, may also be useful. This could include factors that influenced the setting of prices or the establishment of any pricing policies for the taxpayer and the whole MNE group. For example, these policies might be to add a mark up to manufacturing cost, to deduct related costs from sales prices to end users in the market where the foreign associated enterprises are conducting a wholesale business, or to employ an integrated pricing or cost contribution policy on a whole group basis. Information on the factors that lead to the development of any such policies may well help an MNE to convince tax administrations that its transfer pricing policies are consistent with the transactional conditions in the open market. It could also be useful to have an explanation of the selection, application, and consistency with the arm’s length principle of the transfer pricing method used to establish the transfer pricing. It should be noted in this respect that the information most useful to establishing arm’s length pricing may vary depending upon the method being used ...

“In particular transfer pricing cases it may be useful to refer to information relating to each associated enterprise involved in the controlled transactions under review, such as: a) an outline of the business; b) the structure of the organisation; c) ownership linkages within the MNE group; d) the amount of sales and operating results from the last few years preceding the transaction; e) the level of the taxpayer’s transactions with foreign associated enterprises, for example the amount of sales of inventory assets, the rendering of services, the rent of tangible assets, the use and transfer of intangible property, and interest on loans.” ...

An analysis under the arm’s length principle generally requires information about the associated enterprises involved in the controlled transactions, the transactions at issue, the functions performed, information derived from independent enterprises engaged in similar transactions or businesses, and other factors discussed elsewhere in these Guidelines, taking into account as well the guidance in paragraph 5.4. Some additional information about the controlled transaction in question could be relevant. This could include the nature and terms of the transaction, economic conditions and property involved in the transactions, how the product or service that is the subject of the controlled transaction in question flows among the associated enterprises, and changes in trading conditions or renegotiations of existing arrangements. It also could include a description of the circumstances of any known transactions between the taxpayer and an independent party that are similar to the transaction with a foreign associated enterprise and any information that might bear upon whether independent enterprises dealing at arm’s length under comparable circumstances would have entered into a similarly structured transaction. Other useful information may include a list of any known comparable companies having transactions similar to the controlled transactions ...

The information relevant to an individual transfer pricing enquiry depends on the facts and circumstances of the case. For that reason it is not possible to define in any generalised way the precise extent and nature of information that would be reasonable for the tax administration to require and for the taxpayer to produce at the time of examination. However, there are certain features common to any transfer pricing enquiry that depend on information in respect of the taxpayer, the associated enterprises, the nature of the transaction, and the basis on which the transaction is priced. The following section outlines the information that could be relevant, depending on the individual circumstances. It is intended to demonstrate the kind of information that would facilitate the enquiry in the generality of cases, but it should be underscored that the information described below should not be viewed as a minimum compliance requirement. Similarly, it is not intended to set forth an exhaustive list of the information that a tax administration may be entitled to request ...

Tax administrations should limit the amount of information that is requested at the stage of filing the tax return. At that time, no particular transaction has been identified for transfer pricing review. It would be quite burdensome if detailed documentation were required at this stage on all cross-border transactions between associated enterprises, and on all enterprises engaging in such transactions. Therefore, it would be unreasonable to require the taxpayer to submit documents with the tax return specifically demonstrating the appropriateness of all transfer price determinations. The result could be to impede international trade and foreign investment. Any documentation requirement at the tax return filing stage should be limited to requiring the taxpayer to provide information sufficient to allow the tax administration to determine approximately which taxpayers need further examination ...

Documents also may be helpful for showing the process of negotiations for determining or revising prices in controlled transactions. When taxpayers negotiate to establish or to revise a price with associated enterprises, documents may be helpful that forecast profit and administrative and selling expenses to be incurred by foreign subsidiaries such as personnel, depreciation, marketing, distribution, or transportation expenses, and that explain how transfer prices are determined; for example, by deducting gross margins for subsidiaries from the estimated sales prices to end-users ...

Some relevant financial information might also be in the possession of the foreign associated enterprise. This information could include reports on manufacturing costs, costs of research and development, and/or general and administrative expenses ...

Financial information may also be useful if there is a need to compare profit and loss between the associated enterprises with which the taxpayer has transactions subject to the transfer pricing rules. This information might include documents that explain the profit and loss to the extent necessary to evaluate the appropriateness of the transfer pricing policy within an MNE group. It also could include documents concerning expenses borne by foreign related parties, such as sales promotion expenses or advertising expenses ...

The possible risks assumed that are taken into account in the functional analysis may include risks of change in cost, price, or stock, risks relating to success or failure of research and development, financial risks including change in the foreign exchange and interest rates, risks of lending and payment terms, risks for manufacturing liability, business risk related to ownership of assets, or facilities ...

Information about functions performed (taking into account assets used and risks assumed) may be useful for the functional analysis that ordinarily would be undertaken to apply the arm’s length principle. The functions include manufacturing, assemblage, management of purchase and materials, marketing, wholesale, stock control, warranty administration, advertising and marketing activities, carriage and warehousing activities, lending and payment terms, training, and personnel ...

General commercial and industry conditions affecting the taxpayer also may be relevant. Relevant information could include information explaining the current business environment and its forecasted changes; and how forecasted incidents influence the taxpayer’s industry, market scale, competitive conditions, regulatory framework, technological progress, and foreign exchange market ...

Other special circumstances could involve management strategy or the type of business. Examples are circumstances under which the taxpayer’s business is conducted in order to enter a new market, to increase share in an existing market, to introduce new products into a market, or to fend off increasing competition ...

Special circumstances would include details concerning any set-off transactions that have an effect on determining the arm’s length price. In such a case, documents are useful to help describe the relevant facts, the qualitative connection between the transactions, and the quantification of the set-off. Contemporaneous documentation helps minimise the use of hindsight. As discussed in Chapter I, a set-off transaction may occur, for example, where the seller supplies goods at a lower price, because the buyer provides services to the seller free of charge; where a higher royalty is established to compensate for an intentionally lower price of goods; and where a royalty-free cross-license agreement is concluded concerning the use of industrial property or technical know-how ...

Information on pricing, including business strategies and special circumstances at issue, may also be useful. This could include factors that influenced the setting of prices or the establishment of any pricing policies for the taxpayer and the whole MNE group. For example, these policies might be to add a mark up to manufacturing cost, to deduct related costs from sales prices to end users in the market where the foreign related parties are conducting a wholesale business, or to employ an integrated pricing or cost contribution policy on a whole group basis. Information on the factors that lead to the development of any such policies may well help an MNE to convince tax administrations that its transfer pricing policies are consistent with the transactional conditions in the open market. It could also be useful to have an explanation of the selection, application, and consistency with the arm’s length principle of the transfer pricing method used to establish the transfer pricing. It should be noted in this respect that the information most useful to establishing arm’s length pricing may vary depending upon the method being used ...

In particular transfer pricing cases it may be useful to refer to information relating to each associated enterprise involved in the controlled transactions under review, such as:i) an outline of the business;ii) the structure of the organization;iii) ownership linkages within the MNE group;iv) the amount of sales and operating results from the last few years preceding the transaction;v) the level of the taxpayer’s transactions with foreign associated enterprises, for example the amount of sales of inventory assets, the rendering of services, the rent of tangible assets, the use and transfer of intangible property, and interest on loans; ...

An analysis under the arm’s length principle generally requires information about the associated enterprises involved in the controlled transactions, the transactions at issue, the functions performed, information derived from independent enterprises engaged in similar transactions or businesses, and other factors discussed elsewhere in this Report, taking into account as well the guidance in paragraph 5.4. Some additional information about the controlled transaction in question could be relevant. This could include the nature and terms of the transaction, economic conditions and property involved in the transactions, how the product or service that is the subject of the controlled transaction in question flows among the associated enterprises, and changes in trading conditions or renegotiations of existing arrangements. It also could include a description of the circumstances of any known transactions between the taxpayer and an unrelated party that are similar to the transaction with a foreign associated enterprise and any information that might bear upon whether independent enterprises dealing at arm’s length under comparable circumstances would have entered into a similarly structured transaction. Other useful information may include a list of any known comparable companies having transactions similar to the controlled transactions ...

The information relevant to an individual transfer pricing enquiry depends on the facts and circumstances of the case. For that reason it is not possible to define in any generalized way the precise extent and nature of information that would be reasonable for the tax administration to require and for the taxpayer to produce at the time of examination . However, there are certain features common to any transfer pricing enquiry that depend on information in respect of the taxpayer, the associated enterprises, the nature of the transaction, and the basis on which the transaction is priced. The following section outlines the information that could be relevant, depending on the individual circumstances. It is intended to demonstrate the kind of information that would facilitate the enquiry in the generality of cases, but it should be underscored that the information described below should not be viewed as a minimum compliance requirement. Similarly, it is not intended to set forth an exhaustive list of the information that a tax administration may be entitled to request ...