The BEPS Action Plan (Base Erosion and Profit Fiction) worked out by G-20, provides new requirements to transfer pricing documentation. “This is due to the fact that the tax authorities, while monitoring transaction taxation, experience difficulties in understanding the fact as to how a product or service value chain is formed, saysYaroslav Romanchuk, managing partner of International Legal Center EUCON. This fact gives opportunities for abusive practices and the tax authorities try to fill this gap”.
The requirements of new documentation are based on the principle of transparency and aimed at the exchange of information between tax authorities of different states.
Firstly, in terms of structure, the company group documentation must consist of a Master File, Local File and Financial information. Requirements of each task are described in detail.
The Master File contains a large amount of information of a general nature:
— diagram showing the legal and ownership structure, as well as geographic location of operating companies;
— general written description of economic activities, important factors influencing profit generation;
— description of a supply chain for five main goods or services, as well as any other goods or services accounting for more than 5% of group turnover;
— list and summary of the main services between the group’s members, except for research and development services, including the description of possibilities of the main outlets providing essential services, as well as transfer pricing policy for distribution of service cost within the group;
— description of the main geographic markets for the group’s goods and services;
— brief functional analysis describing the main tasks of each of the group enterprises, i.е. performance of the main functions, risk-taking, the use of important assets.
— description of asset restructuring, acquisition and sale transactions, which took place during the financial year.
— general description of the group strategy related to the development, ownership and operation of intangible assets;
— list of intangible assets or groups of intangible assets, which are essential for transfer pricing purposes, as well as the entities owning them;
— list of strategic contracts between the group entities pertaining to intangible assets, providing research services, etc.;
— general description of transfer pricing policy pertaining to research and development and to intangible assets;
— general description of any material transfers of intangible asset interests among associated enterprises during the financial year;
— general description of the group’s financing, including funding from unrelated creditors;
— general description of transfer pricing policy on financing between associated enterprises.
According to Mr. Romanchuk, consolidated financial statements of the International Tax Planning for the financial year must also be submitted, as well as a list and summary of unilateral group pricing agreements and other tax rules of profit distribution between countries.
The Local File includes:
— description of the group companies management structure within a particular state, the scheme showing the organizational structure, description of all group entities.
— detailed description of economic activities and business strategy, with an indication of the impact of restructuring or operations with intangible assets in the current or previous year, as well as explanations of major aspects of the transactions.
Apart from information of the general character, information on controlled transactions must be in a Local File.
For each material category of controlled transactions, in which the entity is involved, the following information should be provided:
— description of material transactions and the context in which these transactions are carried out, number of payments and shipments of goods, copies of all material agreements between the group’s companies, a party to which the local entity is;
— comparison and functional analysis of a taxpayer and the respective associated enterprises taking into account each category of controlled transactions, determination of the most appropriate transfer pricing method including the transaction category and the reason for choosing a particular method, calculations and comparisons with comparable transactions, descriptions of adjustments, comparative analysis results.
Financial information contains the taxpayer’s annual financial statements and if it is audited, then with the auditor’s report.
As Mr. Romanchuk noted, all these requirements must be implemented into the national legislation of the states and, accordingly, be the basis for preparation of documentation.