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What Is TP Documentation?

A transfer pricing study is a thorough examination of the costs associated with transactions between linked businesses in several nations. The purpose of the transfer pricing case study is to make sure that the prices levied are just, reasonable, and follow market rates. The study helps businesses avoid potential transfer pricing disagreements with tax authorities, which can be expensive and time-consuming.

A corporation needs to acquire a lot of data and information about the relevant transactions to undertake a tp study. This data is used to identify comparable transactions in the market and determine the arm's length price for the transactions. Additionally, the study evaluates the unique circumstances of each transaction, as well as factors like the market conditions at the time of the transaction, the industry, the size and complexity of the transaction, and the specific circumstances of each transaction.

What Is The Objective Behind TP Study?

The key objectives behind transfer pricing in taxation are as follows-

• To ensure that the profits made by an MNE's affiliates in several nations represent the economic contributions made by each firm and that the pricing of intercompany transactions is consistent with what independent parties would have agreed upon under similar circumstances.
  
• To avoid double taxation and disagreements with tax authorities by abiding by local tax rules and regulations in each nation where an MNE conducts business.
  
• To reduce tax obligations as much as possible and increase tax efficiency while also making sure that tp documentation rules are followed and that ethical standards are upheld to reduce the overall tax burden of the multinational enterprise.

TP documentation flow 

Executive Summary 

• The goal of this tp pricing study is to prove that the assessee's specific domestic transactions and overseas transactions were both conducted at arm's length.
  
• The document's flow must be clear and concise, and it should include all of the key observations and conclusions.
  
• The following information should be presented clearly and concisely: 
  
• The findings of the economic analysis, the business of the group and the taxpayer indicate the relationship between the group and the taxpayer.
• The activity performed or services rendered
• The characterization of the entities involved, 
• A list of all international transactions (with value and the methodology used), 
• A conclusion
• The results must also be relevant to that financial year and may need to be updated based on the most recent financial results, changes to the FAR profile, or the amount of tangible and intangible assets owned.

Corporate/ Group Overview 

• This part gives a general overview of the organizational and legal framework of the Company, its Group, and its Group Companies.
  
• The overview must include a brief background (date of incorporation, employee base, global presence, etc.), the operational/shareholding structure (preferably in a flow chart), a brief explanation of the business segments, activities carried out/services provided under each segment, and the product profile.
  
• An evaluation of the financial performance of the company, including its revenues, expenses, and profits, as well as the effect of transfer pricing on those results, should be made in the overview.
  
• The agreement with the group firm should be also mentioned in the company overview.
  

Industry Background 

• The overview should include information on the size, growth rate, and competitive environment of the major market in which the multinational company competes.
  
• The overview should highlight the industry's current trends and problems, including any technology advancements, legislative changes, or shifts in consumer preferences.
  
• The overview should list the key players in the market, such as suppliers, customers, and rivals.
  
• The review should list any sector-specific risks that could have an impact on the related party transactions and transfer pricing policies of the multinational company.
  
• The current state of the industry, including its margins, rate of growth, level of sector development, SWOT analysis, etc.
  

Transfer pricing regulations & their applicability 

The overview should list all applicable local and international tax transfer pricing and regulations, including the OECD tp guidelines that apply to the multinational company..

• International Transfer Pricing

Determine an international transaction under Section 92B using the information on Form 3CEB.

The section needs to list the determined foreign transactions, both in terms of AEs and value.

• Associated Enterprises Transfer Pricing

Using the financials' related party declaration, calculate AE under section 92A.

Describe the nature of the partnership between the assessee and the AE.

Provide a short description of AE.

FAR Analysis 

• The overview should explain the duties carried out by each linked party participating in the transaction, as well as the tasks accomplished, the amount of expertise and ability needed, and how each party contributed to the value-creation process.
  
• The overview should list all of the assets used by each related party involved in the transaction, including both tangible and intangible assets, real estate, machinery, and equipment, as well as intellectual property.
  
• Based on the analysis of functions, assets, and risks, the overview should describe the methodology used to allocate profits between related parties involved in the transaction.
  
• The overview should specify any comparable data or benchmarks, such as information on comparable transactions carried out by unrelated parties in the same or related industries that were used to support the transfer price study.

Economic Analysis 

• To calculate the arm's-length pricing, it is necessary to look for comparable businesses and data sets.
  
• The companies were chosen as the comparables are briefly described along with the industry.
  
• It is necessary to calculate the proper arm's length pricing as well as the profit level indicator suitable for the transaction.
  
• If the transfer price is beyond the arm's length price range, adjustments must be made. If necessary, the range concept is also used in accordance with the prescribed rules.

What Are The Transfer Pricing Documentation Requirements In India?

The Master File:

A detailed report that provides an overview of worldwide corporate operations, including organizational structure, business activities, and intangible assets.

Local File:

Detailed information about the Indian entity, including related-party transactions, financials, and the use of selected transfer pricing methods.

Country-by-Country Report (CbCR):

Applicable to multinational firms that meet certain criteria and provide a breakdown of worldwide income allocation, taxes paid, and certain measures of economic activity.

Report of the Accountant:

A certificate from an accountant confirming compliance with the transfer pricing regulations.

Form 3CEB:

A chartered accountant's report certifying compliance with tp requirements filed as part of the annual tax return.