Transfer Pricing: Compliance Requirements, Due Dates, and Penalties

Transfer​‍​‌‍​‍‌​‍​‌‍​‍‌ pricing deals with the prices that are set for the transactions that exist between the related entities of the multinational enterprise (MNE), hence ensuring that the transactions are at arm’s length. Due to the increasing globalization and cooperation of the regulations, the risk involved for the taxpayers is currently very high for the matter of transfer pricing. Thus, besides the requirement for the correct policy design, there is the need for following the documentation timelines and other requirements within the law.

The arm's length principle, which is recognized by the Organisation for Economic Co-operation and Development (OECD) Model, holds that the price charged for transactions between related parties should not differ from that charged for comparable transactions between third parties. In effect, in order to ensure that they are complying with a set of rules, taxpayers are expected to apply proper methods of determining their transfer prices, which, in turn, should then be supported by a Functional, Asset, and Risk (FAR) analysis. There has to be a quite complex paperwork to provide a guarantee for a choice of method and the obtained price for transactions between related entities.

In response to the guidance provided by the OECD’s BEPS Action 13, several nations began using a three-tier system of documentation, which includes the Master File, Local File, and Country by Country Report. It is worth mentioning that this could lead to a better understanding of the global and local situation by tax administrations through additional information about the MNE’s operations and distribution of profits at a global and local level.

Deadlines for transfer pricing compliance vary across countries, although it is generally linked with the tax return submission requirement on an annual basis. In a large number of countries, the timing for transfer pricing documentation takes place simultaneously, and the documents are submitted only upon request during the time of audits. In India, for example, the transfer pricing audit report in the form 3CEB can be submitted up to 31st October each year at the end of the financial-year closing while the master file and CBCR deadlines are not the same. Similar deadlines are applicable in countries like the US, the UK, and the member countries of the European Union.

The penalties for non-compliance may also be very stringent and are occasioned by the following:

Failure to document or make available transfer prices.

Inaccurate or incomplete reporting of intercompany transactions

Non-arm’s length prices and understatement of income

Non-filing and late filing of CBCR and audit reports.

In various countries, fines rest upon a fixed percentage of the transaction value of the international transaction or taxes that were understated. For instance, in the case of documentation errors, fines can begin from 2% of the transaction value, while in mis-statement cases, they can be as high as 50% – 200% of the amount of evaded taxes. Further, the component of interest charges for change in taxes coupled with possible protracted litigation contributes to making it more costly.

Given the heightened focus, as well as the flow of information among tax departments, it is no longer a situation where transfer pricing compliance should be treated lightly. It is therefore important to be proactive, ensuring compliance with transfer pricing on time, adhering to accuracy in documentation, and also performing a regular review of policies. While transfer pricing compliance is useful in avoiding penalties, it is also a move in the right direction in ensuring compliance with tax sustainability in a regulated world.