Transfer Pricing Documentation - Putting a Framework to the Test

Abstract: During the last two decades the global trading has had a striking increase. The combination of increased internal transactions together with more complex structures of ownership within international companies have complicated the possibility of authority control of transfer pricing. In 1995 the OECD, Organisation for Economic Co-operation and Development, issued updated guidelines for use of transfer pricing in multinational companies. This resulted in a recommendation of the arm’s length principle for transfer pricing. Companies in countries that regulate these guidelines by law can be expected to prove arm’s length principle . This is done by documenting their transfer pricing by following several steps developed by the OECD. Sweden is expected to follow many other countries and regulate the guidelines by law sometime early in 2005. Many perspectives are already frequently debated and researched regarding this issue. However the company perspective in terms of compliance burden and the conflict between external demands and internal efficiency has not sufficiently been researched. The main objective of this study is to apply a framework of determining transfer pricing methods in a company, with the intent to describe and analyse its practical use. Further the authors hope to suggest improvements of the framework used, as well as present valuable lessons for a company faced with transfer pricing documentation requirements. Due to the practical nature of this study the empirical studies are estimated to have a higher degree of relevance of developing theory than the use of old theory. Therefore the inductive approach is argued to be dominant. The methodology is highly influenced by theory, as the framework applied outlines theories of which internal relationships are important to examine according to the OECD. The case specific relationships, which will be drawn from the empirical data, are in turn estimated to set limits and boundaries for the methodology. The data gathering is a large part of the study and was done in a qualitative manner and an interpretative approach. The practical use of the framework must be considered in regards to the circumstances of the specific case. Examples and suggestions of framework improvements should therefore not be seen in absolute terms. Two major conclusions are found through the study. The first one addresses problems of using standardised models not adjusted to the specific case which leaves gaps in interpreting the documentation. Other stakeholders such as consultant firms may benefit from this and push the need for their services. The second conclusion outlines the need to put transfer pricing in operational and organisational context. In discussing these issues with the help of researched literature findings indicate how to view the extent of the transfer pricing documentation requirement issue. A cyclic relationship was found in terns of overall business planning, operational and legal business structure, extent of transfer pricing being used and the importance of the documentation requirement. These affect the need to focus on the documentation requirement. Depending on the degree of importance of the documentation requirement it may affect the overall business planning.