Navigating Transfer Pricing Documentation Requirements in the US: Contemporaneous, Three-tiered, and Deadlines
Contemporaneous Documentation:
- Contemporaneous documentation is essential to support a taxpayer’s transfer pricing position, and includes the tax return, Schedules 5471 and 5472, and the taxpayer’s own analysis and representations to tax auditors.
- US corporations must maintain adequate books and records, including those relevant to related party transactions, and make them available to the IRS for inspection for as long as their contents are material to the administration of any internal revenue law.
- Specific record keeping requirements for transfer pricing are set out in Sections 6038 and 6038A, which require US companies to file information returns on Form 5471 for foreign entities under their control, and on Form 5472 for transactions with related parties.
- The required documentation is divided into principal documents (including an overview of the taxpayer’s business, the organizational structure, transfer pricing method selected, comparables used, and economic analysis relied upon) and background documents, which need not be provided unless requested by the IRS.
- The US is a member of the Pacific Association of Tax Administrations (PATA), which issued a documentation package aimed at simplifying compliance requirements for transfer pricing documentation, but has not fully achieved its objective.
- Final regulations under section 385, effective from 4 November 2019, repealed the detailed documentation requirements for certain related-party interests in a corporation to be treated as indebtedness for federal tax purposes. These regulations generally affect corporations that issue purported indebtedness to related corporations or partnerships.
Three-tiered Documentation:
a) Local File
- Documentation requirements in the US require information on related party transactions similar to that listed under the BEPS local file requirements.
- The US principal documentation requirements on related party transactions include transfer pricing documentation of the taxpayer’s transfer pricing policies and the results of their application.
- The documentation must be prepared contemporaneously with the preparation of the income tax return and should be available upon request by the Internal Revenue Service (IRS).
b) Master File
- Documentation requirements in the US require information on the group organization and business similar to that listed under the BEPS master file requirements.
- The US principal documentation requirements on the group organization and business include a description of the MNE’s business, the MNE’s organizational structure, and the MNE’s transfer pricing policies.
- The documentation must be prepared contemporaneously with the preparation of the income tax return and should be available upon request by the IRS.
c) Country by Country (CbC) Reporting
- On 29 June 2016, the Treasury released final regulations for country by country (CbC) reporting by US entities that are the ultimate parent of a multinational enterprise (MNE) with annual revenue above USD 850 million.
- The final regulations are based on the model template in the BEPS report and are due at the same time as the tax return for the parent entity of the MNE group.
- The ultimate US parent entity is required to file with its annual tax return Form 8975, which is the CbC report.
- The IRS released on 20 January 2017 an advance version of Rev. Proc. 2017-23 describing the process for filing Form 8975.
- A separate Schedule A should be filed for each tax jurisdiction in which one or more constituent entities of the group are resident.
- Information required on the constituent entities of the US multinational group for the relevant period includes the complete legal name, tax jurisdiction of residence, tax identification number, and main business activity or activities.
- Revenues generated from transactions with other constituent entities of the US MNE group, revenues not generated from transactions with other constituent entities of the US MNE group, profit or loss before income tax, income tax paid on a cash basis to all tax jurisdictions, accrued tax expense recorded on taxable profits or losses, stated capital, accumulated earnings, number of employees on a full-time equivalent (FTE) basis, and net book value of tangible assets other than cash or cash equivalents, intangibles or financial assets are also required.
- CbC Reporting data is exchanged under bilateral Competent Authority Arrangements (CAAs) relying on double taxation conventions, tax information exchange agreements, or the Convention on Mutual Administrative Assistance in Tax Matters.
- The penalty rules under section 6038 generally apply, including reasonable cause relief for failure to file in case of non-compliance. If the CbC report is not filed in time, a penalty of USD 10,000 will be applicable for each annual accounting period with respect to which such failure exists.
- As per the IRS bulletin updated on 11 August 2017, parent entities of U.S. multinational enterprise groups with USD 850 million or more of revenues in a previous annual reporting period can now file Form 8975 with their annual income tax return.
- In September 2017, the IRS published on its website the CbC Reporting Jurisdiction Status Table showing the jurisdictions that have signed a CAA with the US on CbC reporting and the jurisdictions that are in negotiations with the US and have satisfied the US bilateral data safeguards and given their permission to be included in the list.
Documentation Deadlines:
- The documentation must exist when filing or preparing an income tax return.
- The documentation must be supplied to the IRS within 30 days if requested for review.
- The documentation should be prepared contemporaneously.
- The IRS can request to review the documentation.