All about transfer pricing- Part 1 -Transfer Pricing Documentation

Transfer pricing involves determination of arm length price of transaction between two associated enterprises and basis of arm length price is demonstrated through robust and transparent documentation. Transfer pricing documentation includes: –

Transfer Pricing Policy

Transfer pricing policy is prepared by the Multinational Enterprises{“MNE”)  having various associated enterprise to envisage a basis for transfer pricing in the MNE group and respective value drivers in the value or supply chain of the MNE business model and this is part of internal control documentation of the MNE’s. Some of the important section of the transfer policy are as given below:-

1. Overview of the group

2. Functional, asset and risk analysis

3. Conclusion

Transfer pricing Agreement (Intercompany agreement)

In order to minimization  of the transfer pricing adjustment risk & appropriately identify the value proposition which each AE offers in the MNE value chain so that international transaction and conduct of the AE  are on synch. It is similar to the agreement between the two independent parties. Parameter considered in drafting of the agreement

1. Contractual terms
2. Functional analysis
3. Rationality and benefit derived in international armlength transaction

Life Cycle of the Extensive and Contemporaneous information and documentation in the transfer pricing

Requirement: – TP regulation require thorough audit trail for the justification of arm length pricing between two associated enterprises

• Planning file- This is initial draft of the local file- Planning file shall broadly include the fact related to the business of MNE , industry Analysis, proper functional, assets and risk analysis and determination of the proposed arm length price

• Local file (Extension of the Planning file) -This is TP Study Report to be maintained as required by Rule 10D . This shall not be file with the TP regulation and need to submit only when asked by the authority. Threshold Limit of Rs. 1 Crore provided in the law. Information included In the TP local file is as given below

• • Entity related-Profile of the group, Industry Local entity in india & associated enterprises)
  • Pricing Relate- Details of the transactions functional assets and risk analysis , Benchmarking
  • Transaction Related- Invoices , terms and condition.

• Master File (Blue print of the MNE Group)- This has been Introduced in the Finance Act 2016 in section 92D of the Act. Rule 10DA shall prescribe to submit the detailed before the TP regulation in the form 3CEAA or 3CEAB by constituent entity of an international group & the record shall be maintained for eight years. Information in the master file – MNE’s Group organizational structure MNE’s Business Description, MNE’s Intangible MNE’s International financial activities MNE’s Financial and tax position

• CBCR Reporting-India has introduced in 2016 as  a new reporting of CBCR reporting being the active BEPS initiative in section 286. Rule 10DB require that a report to be furnished before the TP authority in the prescribed manner and prescribed form i.e. 3CEAD by parent company or alternative reporting entity of the MNE Group in India.

This is Standardized approach for documentation in the  three tired methodology by the BEPS Action Plan 13(i.e. Local file , Master file& CBCR Reporting)

Summary

TP documentation can be categorized into the three section:-

• Industry Analysis [Rule 10D(1)(c)] – Indicative point for discussion- Global Market Outlook, Domestic Market Outlook, Key value Driver, Regulatory Frameworks, Major Competitors, SWOT Analysis, Status of taxpayer position in the industry

• Functional Analysis [Rule 10D(1)(e)]– The whole process of the functions performed risk assumed and assets employed in the process of international transaction is termed as functional Analysis. On the basis of the functional Analysis entities can be broadly characterized into following three groups.

• Economic Analysis– It includes selection of the tested party and selection of the most appropriated method. Some of the method given in the act for the purpose of computation of the arm length price is as given below: –
  • Traditional Transactional methods -Comparable Uncontrolled Price, Resale Price Method , Cost Plus Method
  • Transactional Profit methods -Profit Split Method, Transactional Net Margin Method