Multinational groups conducting cross-border related-party transactions must ensure their intercompany arrangements comply with the arm's length principle. Transfer pricing rules apply to sales and purchase of goods, provision of services, licensing of intangible assets, and also intragroup financing arrangements. The arm's length principle requires related-party transactions (RPT) to be concluded under pricing and contractual terms that independent third-party enterprises would agree to under comparable circumstances. 

Transfer pricing rules are materially important because they govern how group profit is allocated among group entities operating in different jurisdictions. Tax authorities are empowered to make transfer pricing adjustments where related-party prices fall outside arm's length ranges. Adjustments trigger additional tax liabilities, fines and potential penalties. 

To support and justify their transfer pricing policies, multinational groups are required (or in some jurisdictions strongly incentivized) to prepare contemporaneous documentation. Such set of documents provide supporting evidence and analysis to transfer pricing policies and must be prepared at the time the related-party transactions take place and cannot be created retroactively once a tax audit has commenced.

Contemporaneous documentation serves to support that intercompany pricing policies comply with the arm's length principle. In many jurisdictions complete, compliant documentation delivers penalty mitigation benefits. It also improves audit readiness and streamlines interactions with tax administrations during compliance enquiries and investigations.

Contemporaneous documentation follows a three-tier structure under BEPS Action 13 framework, consisting of a master file, a local file, and a Country-by-Country report for large-size multinationals. Certain jurisdictions impose additional local specific reporting or special matter documentation requirements. 

The master file delivers a high-level global overview of the multinational group. It describes the group organizational and ownership structure, its global supply chain, ownership of key assets, intragroup financing policies and arrangements, and the overall transfer pricing strategy. Its purpose is to give tax authorities an overall picture of where and how the multinational operates and creates economic value.

The local file is jurisdiction-specific and transaction-focused. It covers the local entity organizational structure, its functions – assets – risks (FAR) analysis, description and quantification of related party transactions, justification for the selected transfer pricing method, comparability analysis and benchmarking study establishing the arm's length range, plus relevant intergroup agreements, financial data and supporting evidence. The purpose of the local file is to prove that prices applied for local jurisdiction related-party transactions meets the arm's length principle at the time the transaction occurs. 

The Country-by-Country Report (CbCR) is a separate high-level group-level report for multinationals exceeding a consolidated revenue threshold (generally €750 million or equivalent in local currency). It discloses a breakdown of income, taxes accrued and paid, business activities and constituent entity list by jurisdiction. Tax authorities rely on CbCR for high-level transfer pricing risk screening and assessment.

While most jurisdictions follow the BEPS Action 13 framework, applicable transaction thresholds, preparation deadlines and filing formalities differ significantly from country to country. Multinationals with global presence and subsidiaries across different jurisdictions need to coordinate transfer pricing compliance planning to satisfy each jurisdiction’s local requirement. 

In numerous jurisdictions, groups have no mandatory filing obligation, but documentation shall be prepared within the deadlines and submitted to tax authorities within a statutory reply-window (generally 30 days) when requested during a tax audit.

While jurisdictions follow aligned content standards for contemporaneous documentation, local administrative rules, related-party transaction thresholds and statutory deadlines vary significantly. Documents must be ready to tax authorities upon audit related request. 

At PHC Advisory we support clients in navigating multi-jurisdictional transfer pricing rules. We review transfer pricing policies, and assist with preparing mandatory documentation, and help justifying intercompany pricing via arm’s length range assessments and transaction-specific benchmarking analysis. Transfer pricing compliance is globally designed and locally implemented. Robust, complete compliance is critical to mitigate the risk of unexpected tax adjustments, additional tax liabilities, fines and penalties.

At PHC Advisory, we can offer you full support on matters regarding doing business in China, or any other issues your business may face. If you would like to know more about policies relevant to your business in Italy or Asia, please contact us at info@phcadvisory.com.  

PHC Advisory is a company of  DP Group: an international professional services conglomerate of companies with approximately 100 experienced professionals worldwide. We offer comprehensive services in tax, accounting, and financial consulting, including financial supervision, financial audit, internal audit, internal control over financial reporting, and support for audited financial statements and annual audits, ensuring clients' financial transparency and compliance. 

Would you like to learn more about the business environment in China? Click the link and download our Practical Guides on Amazon! 

The content of this article is provided for informational purposes only, financial advice must be tailored to the specific circumstances on a case-by-case basis, and the contents of this article do not legally bind PHC Advisory with the reader in any way. 

• Navigating China Exit: An Overview of FIEs Liquidation-NEWS-PHC ADVISORY

• PRC Corporate Income Tax Treatment for Equity Transfers-NEWS-PHC ADVISORY