Pacific Association of Tax Administrators (PATA) Transfer Pricing Documentation Package

I. Introduction

The PATA members, which include Australia, Canada, Japan and the United States, are providing principles under which taxpayers can create uniform transfer pricing documentation ("PATA Documentation Package") so that one set of documentation can meet their respective transfer pricing documentation provisions. Use of this PATA Documentation Package by taxpayers is voluntary and does not impose any legal requirements greater than those imposed under the local laws of a PATA member. In this regard, it should be noted that each PATA member has different legal systems, statutes, regulations and administrative approaches with respect to transfer pricing Footnote 1. The PATA members, after reviewing their respective domestic laws regarding transfer pricing and documentation of controlled transactionsFootnote 2, agree that a multinational enterprise ("MNE") will satisfy each PATA member's documentation provisions by complying with all of the principles contained in this PATA Documentation Package, and will thus avoid the imposition of the PATA members' transfer pricing penaltiesFootnote 3 with respect to the documented transactions among associated enterprises resident in PATA member jurisdictions. However, satisfaction of the principles of this PATA Documentation Package does not preclude PATA member tax administrations from making transfer pricing adjustments, and assessing any interest due on those adjustments.

This PATA Documentation Package responds to the potential difficulties that MNEs face in complying with the laws and administrative requirements of multiple tax jurisdictions. MNEs may face significant and potentially costly duplicative administrative requirements in order to meet the transfer pricing documentation standards of the different jurisdictions. By providing taxpayers with the option of applying this uniform documentation package, the PATA members intend to assist taxpayers to efficiently prepare and maintain useful transfer pricing documentation, and timely produce such documentation upon request to PATA member tax administrations while precluding any related transfer pricing penalties. It is considered that this documentation package is consistent with the general principles outlined in Chapter V of the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations ("OECD Guidelines").

II. The PATA Documentation Package

Taxpayers that choose to use the PATA Documentation Package in order to avoid the imposition of PATA member transfer pricing penalties with respect to a transaction need to satisfy three operative principles. First, MNEs need to make reasonable efforts, as determined by each PATA member tax administration, to establish transfer prices in compliance with the arm's length principle. Second, MNEs need to maintain contemporaneous documentation of their efforts to comply with the arm's length principle. Third, MNEs need to produce, in a timely manner, that documentation upon request by a PATA member tax administrator. These three operative principles are more fully explained below.

A. Efforts to comply with the arm's length principle in establishing transfer prices

The first principle is that taxpayers need to make reasonable efforts to establish their transfer pricing in accordance with the arm's length principle. Such efforts include, but are not limited to, analysis of controlled transactions, searches for comparable transactions between independent enterprises dealing at arm's length, and selection and application of transfer pricing methods that are reasonably concluded to produce arm's length results in accordance with applicable PATA member transfer pricing rules and the relevant treaty, consistent with the OECD Guidelines.

B. Contemporaneous documentation of efforts to comply with the arm's length principle

The second principle is that taxpayers need to reasonably and contemporaneously document their efforts to comply with the arm's length principle. Contemporaneous documentation helps taxpayers and tax administrations in the examination process by giving taxpayers notice of information needed to assess whether prices of controlled transactions comply with the arm's length principle. Such documentation also provides tax administrations with useful analysis of controlled transactions between associated enterprises and assists in minimizing controversies over potential transfer pricing issues. Documentation is contemporaneous if it is existing or brought into existence no later than the due date, under the relevant PATA member's rules, of a timely filed (taking into account extensions allowed by the PATA member) income tax return for the taxation year of the controlled transactions at issue (and includes relevant information through such date).

The attached scheduleFootnote 4 describes the documentation for purposes of satisfying the second operative principle of the PATA Documentation Package. An analysis under the arm's length principle is generally based on information about the associated enterprises involved in the controlled transactions, the transactions at issue, the relevant functions, assets and risks, and information derived from independent enterprises engaged in similar transactions or businesses. A taxpayer needs to prepare and maintain the documentation for transactions or arrangements between itself and an associated enterprise resident in another PATA member jurisdiction, as necessary to demonstrate compliance with the arm's length principle. Transfer pricing documentation prepared and maintained pursuant to this PATA Documentation Package needs to be adequate and of sufficient quality so as to evidence that the taxpayer reasonably concluded that it selected and applied a transfer pricing method that produced an arm's length result in accordance with applicable PATA member transfer pricing rules and the relevant treaty, consistent with the OECD Guidelines. In evaluating the quality of an MNE's documentation, each PATA member tax administration will take into account all the relevant facts and circumstances, which for example may include: the extent to which reliable data was reasonably available and analysed in a reasonable manner and the significance, importance and complexity of the taxpayer's transfer pricing issues.

Additional information not listed on the attached schedule may be requested by a PATA member tax administration as necessary to examine an MNE's conclusions as to the arm's length nature of its arrangements.

C. Timely production of documentation evidencing efforts to comply with the arm's length principle

The third general principle is that taxpayers need to timely produce the foregoing documentation upon request by a PATA member tax administration in order to benefit from the penalty protection afforded by this Package. Upon request by a PATA member tax administration, documentation needs to be provided to a tax administration in accordance with each PATA member's respective rules, if any, on timely production of documentation. A PATA member may request a PATA Documentation Package only to the extent it relates to transactions involving that jurisdiction, and as provided by each PATA member's domestic laws and relevant treaty. It is usually in a taxpayer's interest to provide this documentation to the tax administration early in a transfer pricing review or audit as it will assist in demonstrating whether its transfer pricing is appropriate for tax purposes. The confidentiality of the information submitted by taxpayers will be safeguarded in accordance with the usual treaty and domestic laws regarding disclosure.

Schedule – Transfer pricing documentation to be provided by taxpayers

To avoid the imposition of PATA member transfer pricing penalties, the taxpayer needs to maintain and upon request, produce in a timely manner, documentation of sufficient quality so as to accurately and completely describe the transfer pricing analysis conducted by the taxpayer and the efforts to comply with the arm's length principle. The list of documents below is considered to be exhaustive. That is, it includes all documents that the PATA tax administrations view as necessary in order to provide transfer pricing penalty relief under this package. However, it is recognized that in certain instances, some of the documents below would not be needed. For example, where a taxpayer is not involved in a Cost Contribution Arrangement or market share strategy, it follows that the documents relevant to such arrangement or strategy are not needed.

Organizational structure

Nature of the business/industry and market conditions

Controlled transactions

Assumptions, strategies, policies

Cost contribution arrangements (CCA)Footnote 5

Comparability, functional and risk analysis

Selection of the transfer pricing method

Application of the transfer pricing method

Background documents

Index to documents

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