Transfer Pricing Documentation in the United States: OverviewBy Robert Robillard - 28 May 2014
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Section 18.104.22.168.4 of the IRS Audit Manual states:
“The final regulations under IRC section 6662(e) require taxpayers to provide the following documentation:
- An overview of the taxpayer’s business
- A description of the taxpayer’s organizational structure covering all related parties engaged in controlled transactions documentation explicitly required under IRC 482 and the treasury regulations thereunder.
- A description of the transfer pricing method selected; this description should include an explanation of why it was selected
- A description of the other transfer pricing methods considered; this description should include an explanation of why they were not selected
- A description of the controlled transactions
- A description of the comparables used; this description should include an explanation of how comparability was evaluated
- An explanation of the economic analysis and projections relied upon in developing the method
- A description of any relevant data obtained between the end of the year and the filing of the tax return
- A general index of the principal and background documents.”
These transfer pricing documentation requirements are in fact listed in Section 1.6662-6 of the Code of Federal Regulations. They are similar to the Canadian requirements pertaining to transfer pricing documentation.
For greater certainty, item (d)(2)(iii) of §1.6662-6 Transactions between persons described in section 482 and net section 482 transfer price adjustments indicates:
“(iii) Documentation requirement—(A) In general. The documentation requirement of this paragraph (d)(2)(iii) is met if the taxpayer maintains sufficient documentation to establish that the taxpayer reasonably concluded that, given the available data and the applicable pricing methods, the method (and its application of that method) provided the most reliable measure of an arm’s length result under the principles of the best method rule in §1.482-1(c), and provides that documentation to the Internal Revenue Service within 30 days of a request for it in connection with an examination of the taxable year to which the documentation relates. With the exception of the documentation described in paragraphs (d)(2)(iii)(B) (9) and (10) of this section, that documentation must be in existence when the return is filed. The district director may, in his discretion, excuse a minor or inadvertent failure to provide required documents, but only if the taxpayer has made a good faith effort to comply, and the taxpayer promptly remedies the failure when it becomes known. The required documentation is divided into two categories, principal documents and background documents as described in paragraphs (d)(2)(iii) (B) and (C) of this section.
(B) Principal documents. The principal documents should accurately and completely describe the basic transfer pricing analysis conducted by the taxpayer. The documentation must include the following—
(1) An overview of the taxpayer’s business, including an analysis of the economic and legal factors that affect the pricing of its property or services;
(2) A description of the taxpayer’s organizational structure (including an organization chart) covering all related parties engaged in transactions potentially relevant under section 482, including foreign affiliates whose transactions directly or indirectly affect the pricing of property or services in the United States;
(3) Any documentation explicitly required by the regulations under section 482;
(4) A description of the method selected and an explanation of why that method was selected, including an evaluation of whether the regulatory conditions and requirements for application of that method, if any, were met;
(5) A description of the alternative methods that were considered and an explanation of why they were not selected;
(6) A description of the controlled transactions (including the terms of sale) and any internal data used to analyze those transactions. For example, if a profit split method is applied, the documentation must include a schedule providing the total income, costs, and assets (with adjustments for different accounting practices and currencies) for each controlled taxpayer participating in the relevant business activity and detailing the allocations of such items to that activity. Similarly, if a cost-based method (such as the cost plus method, the services cost method for certain services, or a comparable profits method with a cost-based profit level indicator) is applied, the documentation must include a description of the manner in which relevant costs are determined and are allocated and apportioned to the relevant controlled transaction.”
Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Transfer Pricing Chief Economist, RBRT Inc.
514-742-8086; robert.robillard “at” rbrt.ca
RBRT Inc. is all about transfer pricing. We specialize in transfer pricing. Our services include transfer pricing documentation, transfer pricing dispute resolution, advanced pricing agreement (APA), value chain management and TP planning, transfer pricing training. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. RBRT Inc. and the author are not responsible or liable for any error, omission or inaccuracy in such information. Readers should seek independent tax advice and tax counsel from RBRT Inc. as required.
The content of this article first appeared at https://cantransferpricing.wordpress.com maintained by Robert Robillard.