A term often used in transfer pricing lingo is “contemporaneous transfer pricing documentation.” The meaning of this term is not always clear for everyone. In this short article we explain what it means.
What does contemporaneous mean?
Based on the online Cambridge dictionary “contemporaneous” means “happening or existing at the same period of time”.
In the world of transfer pricing, contemporaneous documentation means:
…the documentation and information that taxpayers have relied upon to determine the transfer price prior to, or at the time of undertaking an intercompany transaction.
Are there any limits to the recency of the files?
In most countries, taxpayers nowadays are required by law to have contemporaneous transfer pricing documentation available to substantiate the transfer pricing applied to their intercompany transaction(s). To achieve this, a taxpayer must use the latest available information and data.
Normally, tax administrations also accept transfer pricing documentation as “contemporaneous” when it has been prepared not later than the filing due date of the tax return for the financial year in which the intercompany transaction took place.
What is the scope of contemporaneous documentation?
In theory, the scope of contemporaneous transfer pricing documentation is very broad. After all, a wide variety of information and data may be relevant when determining transfer prices.
Fortunately, the OECD has acknowledged that taxpayers should not be expected to incur disproportionately high costs when producing documentation. Tax authorities should balance requests for documentation against the expected cost and administrative burden to the taxpayer creating it.
Example of contemporaneous transfer pricing documentation in practice:
In FY 2020, Cheerful Cheesecakes Holdings grants a USD 5m loan to its subsidiary: Cheerful Cheesecakes Trading. Both entities are tax resident in Singapore. To determine the arm’s length terms and conditions for this loan transaction, including the interest rate, a benchmark study is done, and a transfer pricing report is prepared.
The loan transaction is concluded in accordance with the transfer pricing report and processed in the FY 2020 financial statements of both entities.
In 2021, the entities are required to file their corporate tax returns for FY 2020. When preparing these tax returns, the entities assess whether the terms and conditions of the loan still meet the arm’s length test. The conclusion is affirmative. The outcome of the assessment, and the market data that has been gathered is written down in an internal memo.
The loan transaction is reported in the tax return in accordance with the financial statements for FY 2020. In this case, the entities have done their homework and should easily pass the contemporaneous documentation test.
Tips for ensuring contemporaneity in your records
Care to know how to ensure that your transfer pricing documentation qualifies as contemporaneous?
Here are three tips…
1 Start in time
If you start thinking in 2020 about preparing documentation for an intercompany transaction that was undertaken in FY 2018 and reported in a tax return submitted early 2019, you are obviously too late.
Ideally, documentation is in place prior to, or at the time of, undertaking an intercompany transaction. If that isn’t feasible, at least ensure that documentation is in place before the filing due date of the tax return for the financial year in which the intercompany transaction took place.
2 Review Regularly
Transfer pricing documentation usually covers multiple years. This is acknowledged in the OECD. In some cases, this leads to people thinking that documentation can be locked up in a drawer and forgotten. This is incorrect.
One needs to regularly review the documentation and check if there are needs for updates. The bare minimum is once a year when preparing the tax return. But we recommend more frequent reviews to check if the terms and conditions are still in line with market practice—and reflective of reality.
An example of the importance of having frequent reviews is the financial and economic impact of COVID-19 on business models and profitability of enterprises, and as a logical result: their intercompany transactions.
3 Keep clean files
An important lesson we learned when dealing with tax authorities around the world: it is always appreciated if a taxpayer has its files in order.
If requested information is readily available and comprehensive, it shows that a taxpayer has considered matters and is organized. It is therefore advisable to come up with a strategy for gathering, documenting, and storing information relevant to transfer prices. A transfer pricing policy can also help with this.
Solid contemporaneous transfer pricing documentation
Thank you for reading this article.
We trust you understand how to ensure contemporaneity in your transfer pricing documentation.
If you want to prepare rock-solid transfer pricing documentation, make sure to check out our transfer pricing templates.