Arcotia Hatsidimitris - International Tax Dialogue

34 – 3. GETTING OFF TO A GOOD START
records (2) tax adjustment records (3) records of transactions with associated businesses and (4)
evidence to demonstrate an “arm’s length” result it requires business to be able to provide and when
these records need to come into existence. Similarly, Austria has no specific documentation
requirements but a recent court decision has made it clear that the taxpayer must be in a position to
produce data on which a prudent business manager would have been able to base a pricing decision.
In the experience of many tax administrations the crucial issue is not the quantity of transfer
pricing documentation, including any formal transfer pricing report that is provided, but the quality of
the information it contains and whether the facts support the documentation produced.
Tax administrations and business considered that there are advantages and disadvantages to the
two general approaches to business records requirements. Where legislation sets out specific transfer
pricing record requirements this undoubtedly provides some certainty for business, particularly as it
relates to the imposition of penalties for inadequate or incomplete records. On the other hand
legislative requirements are often criticised by business for imposing an undue compliance burden,
particularly where the level of documentation required appears to be out of proportion to the amount
of tax at risk for the controlled transaction under consideration. Some businesses welcome an absence
of statutory requirements and are comfortable relying on the guidance provided, whereas others are
concerned that because of the lack of certainty they err towards overprovision and incur unnecessary
costs. Major advisory firms often need to review transfer pricing policies and the relevant business
records for their clients in the context of certifying financial statements, and in some cases in
connection with due diligence exercises associated with mergers and acquisitions. The level of risk of
subsequent litigation can affect the depth of the review required.
Whilst some advisers and businesses raised the issue of consistency as between different tax
administrations, most were unwilling to achieve consistency at the price of all tax administrations
moving to the approach of the most onerous. Advisers also asked that tax administrations remember
that the document keeping requirement in one tax administration can inform another tax
administration of the documents likely to be available.
Despite these variations in approach the practical experience of tax administrations in dealing
with business records is remarkably similar. Even where there is a statutory framework prescribing
the business records, the quality of the information provided by business can be very variable. The
sheer volume of business records can be an issue as well, making it hard to focus the examination on
the business records that are relevant to the specific issues at the heart of the enquiry. Tax
administrations felt that whilst this was a result of the inherent fact dependent nature of transfer
pricing, the provision of business records could be used as a delaying tactic by business, or even a way
of deliberately distracting the tax administration from the heart of an audit or enquiry. Tax experts in
business too were concerned about the quantity of business records that are maintained to justify the
transfer prices that have been used. They considered that business sees the preparation of voluminous
business records as a way of minimising the risk that tax administrations will seek to make a transfer
pricing adjustment. At the extreme, this can lead to the preparation of certain business records for
their own sake.
There was a broad consensus that in formulating requests for business records tax administrations
should keep at the forefront of their mind the purpose of the audit or enquiry i.e. to test the actual
transactions against the arm’s length standard and to return regularly to this to test the necessity of
obtaining further information. As Annex 3 makes clear, in France the tax administration is careful to
assemble as much information as it can before opening a transfer pricing enquiry and the first step in
the enquiry itself is to meet with the taxpayer and agree what questions need to be addressed and over
what timescale. Whilst in the first instance, the request may have to be fairly wide-ranging in order to
DEALING EFFECTIVELY WITH THE CHALLENGES OF TRANSFER PRICING © OECD 2012