Transfer Pricing Documentation
Originally published by Grant Thornton UK LLP, 9 May 2016
Reinsurance is a common connected-party transaction for groups operating in the insurance sector. This 2016 article from Grant Thornton discusses a key change to the OECD Transfer Pricing Guidelines arising from BEPS and how it impacts the transfer pricing of intra-group reinsurance.
The article concludes that “for many groups there is unlikely to be a sea change in the transfer pricing analysis performed, but there will be a greater level of documentation and evidence required to support the nature of the analysis performed.”
Action 13 of the OECD Action Plan on Base Erosion and Profit Shifting (BEPS) recognises that enhancing transparency for tax administrations by providing them with adequate information to conduct transfer pricing risk assessments and examinations is an essential part of tackling the BEPS problem.
Multinationals with a turnover above €750m in their countries of residence will be required to start using the new Country by Country (CbC) reporting template for fiscal years ending on or after 31 December 2016 with a filing deadline of 31 December 2017.
However, groups with consolidated group revenue less than €750m as at 01/01/2015 will be exempted from filing a CbC report
Therefore, existing standards on TP reporting remain valid for the foreseeable future. This note is a reminder of the key elements of those standards.
A transfer pricing report may be commissioned by an enterprise for a number of reasons, e.g. to set the parameters for a TP policy, to support an existing TP policy or to demonstrate the arm’s length nature of a historical position when there was no TP policy in place.
Whatever the reason for its production, in the initial stages of a transfer pricing audit the tax authority will inevitably ask for this documentation, which will then be examined in considerable detail to determine whether the enterprise’s transfer prices are consistent with the arm’s length position.
A well-constructed TP report will provide all the detail and evidence a tax authority could reasonably require to perform its due diligence obligations.
Whilst the enterprise may have chosen the transfer pricing method and tested party etc. it considers appropriate, the tax authority may challenge those choices. Therefore, the enterprise should be prepared to explain how the profitability of each link in the chain of related-party transactions aligns with its functions, risks, and assets.
The key elements of a well-prepared transfer pricing report are discussed below. More detail can be found in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and by following the embedded links below.
Given the need for countries to protect their tax base in the current economic climate, a continuing aggressive stance by tax authorities to Transfer Pricing can be expected.
So, what actions can a Multi-National Enterprise (MNE) take to minimise its Transfer Pricing risk?
Well, it’s essential to have a Transfer Pricing policy, supported by relevant and appropriate documentary evidence to demonstrate that the outcome is arm’s length. Read the rest of this entry »