Transfer Pricing Documentation
We regularly prepare transfer pricing documentation studies in order to establish the open market price of intra-group transactions and/or to determine the market profitability of group entities (for various activities, e.g. manufacturing, distribution, procurement, treasury, etc), on the basis of the transfer pricing guidance and economic principles and practice.
In doing so, we apply the OECD endorsed transfer pricing methods and approaches, as well as admissible financial and valuation techniques as required for specific transactions. Where needed to improve the reliability of the benchmark results, we perform comparability adjustments, as well as sensitivity analyses and apply statistical tools to arrive at a range (and interquartile range) of supportable results.
Our benchmarks follow a transparent process, which is typically documented in a report, detailing each step and its purpose leading to the results, as per international standards and local specifications.
We have significant expertise in carrying out benchmarking analysis in the following areas:
- Intragroup Services – Taxand Cyprus can help you document intercompany services, such as R&D, management, administrative, marketing, engineering, following a few simple steps. Firstly, we collect all the relevant facts and information from customers, understanding their business and intragroup transactions. Secondly, we group costs into distinct service categories, and we independently review each service category to determine which costs are related to stewardship activities, routine activities, and non-routine services. The third step is to allocate service costs to the group entity which bears them. We calculate arm’s length fees for non-routine services by carrying out a comprehensive economic benchmarking. Finally, by combining elements of the structured approach we calculate the total service fees to each group entity. Our structured approach to documenting intercompany service charges is advantageous for audits as all service fee charges can be traced back to their original source data.
- Intangibles and Royalty Rates – Taxand Cyprus can perform robust and defensible royalty rate evaluations, using both benchmarking and income-based valuation methods for establishing intercompany royalty rates. Such evaluations are necessary where there are licensing agreements between a related tested party and unrelated parties. We have access to a number of licensing databases which enable us to find comparable market transactions and establish arm’s length royalty rates. The transfer pricing Cyprus methods to be used depend on the facts of the particular case at hand.
- Profit Split Methods –are used where there is allocation based on the functions, assets and risks that would be undertaken by third parties. These are known as “routine” returns and they can be determined by economic benchmarking. On the contrary, “non-routine” or “entrepreneurial” returns are computed as a residual profit, which is then split between the parties based on an appropriate allocation principle.
- Other methods like the cost-of-funds approach, economic cost, financial models determining an appropriate return on equity and debt, or other valuation methods can be used to determine arm’s length prices of royalty rates (e.g.).
Transfer pricing documentation reports
BEPS Action 13 established a standardised approach to transfer pricing documentation across the world, which can be adapted taking into account country-specific requirements. This comprehensive approach to transfer pricing documentation can be burdensome as it has to be carried out on an annual basis. Taxand Cyprus can help you manage and comply with transfer pricing and BEPS Action 13 requirements in a timely and cost-effective way.
In delivering our transfer pricing services, we integrate compliance-oriented and policy-guiding approaches by developing intra-group pricing policies based on sound business strategy and well-established economic principles. Our comprehensive analysis of the industry and the client’s value chain, together with accurate analytical methodologies and a transparent presentation of the results enable us to develop transfer pricing solutions that meet both our clients’ demands, furthering their business objectives and comply with the arm’s length requirements imposed by national tax authorities.
Transfer Pricing Documentation – Master File
Preparing a “Master File” in accordance with the recommendations of BEPS Action 13 and national requirements is essential for multinationals conducting global business operations. It can be a practical and cost-efficient way of complying with transfer pricing requirements, especially for those whose entities operate in countries which follow common transfer pricing principles, such as those outlined in the OECD Transfer Pricing Guidelines. The Master file presents a centralised approach to documentation development with information gathering from the global group business of the client and review at the local level. Taxand Cyprus, being part of a global network of tax professionals can help our clients to prepare and comply with the requirements of the Master File Documentation.
Transfer Pricing Documentation – Local File
Preparation of the local file requires compliance with international standards and guidance and also national transfer pricing requirements. The local file must be prepared for each country where the multinational operates and focuses on detailed information and analysis of the intercompany transactions, including relevant financial information regarding those transactions. Taxand Cyprus’s approach to the local file consists of three steps. Under the first step, we perform delineation of the transactions under review, in accordance with the OECD Transfer Pricing Guidelines, to fully understand the intercompany transactions, and undertake a functional analysis based on the functions, assets and risks of the relevant entities to determine their functional profile. The second step involves the economic analysis, where we determine the most appropriate transfer pricing method based on the specifics of each situation and carry out the benchmarking analysis through use of our extensive databases. Step three involves the creation of the required transfer pricing documentation, in compliance with international and national transfer pricing requirements. Taxand Cyprus has experts from different jurisdictions and can assist with preparation of Local Files not only in Cyprus but also abroad, for example in Greece and Luxembourg. To provide enhanced and advanced certainty to our clients, Taxand Cyprus can also obtain tax rulings confirming the application of the arm’s length principle in the local file.
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