TP documentation – building a strong first line of defence against disputes
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TP documentation – building a strong first line of defence against disputes

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Increased transfer pricing documentation requirements are not reducing the number of disputes. Jennifer Breeze, Chris Ferguson, and Simón Somohano of Deloitte offer regional perspectives on the issue and explain what businesses may be able to do to prevent escalation.

In recent years, multinational businesses have operated in an environment where documentation requirements and the number of transfer pricing disputes are increasing.

Following the recommendations of Action 13 of the OECD’s BEPS project published in 2015, many countries implemented three-pronged documentation requirements to have a master file and a local file, and to prepare a country-by-country report in accordance with the action’s minimum standard.

In addition, while global transfer pricing audit or enquiry statistics are not available, OECD statistics on mutual agreement procedures (MAP) to resolve double taxation arising from transfer pricing adjustments are increasing (2020 Mutual Agreement Procedure Statistics – OECD). This may be partly due to more cases being taken to MAP following improvements to the process resulting from BEPS but is also likely to be partly as a result of increasing numbers of transfer pricing enquiries and more adjustments.

This environment of increasing documentation requirements and increasing disputes presents a significant challenge for businesses.

Standardised requirements for documentation are very helpful for businesses. However, the purpose of transfer pricing documentation is to provide evidence that the transactions entered into by entities in particular countries were at arm’s length for tax purposes.

As such, the content of transfer pricing documentation must reflect the relevant facts and circumstances relevant to the local country, which can differ significantly between entities in different countries within the same multinational group.

Preparing transfer pricing documentation can involve extensive work and high costs for businesses, especially if transfer pricing documentation is to operate effectively as the first line of defence against disputes.

This article will explore the role of documentation in defending against disputes and consider the challenge facing businesses as they balance the need to prepare numerous transfer pricing reports across often a great number of jurisdictions with being well prepared for the increased likelihood of transfer pricing disputes arising.

Some businesses may seek advance pricing agreements (APAs) with tax authorities to achieve certainty that disputes will not arise but this approach will not be suitable for all businesses, all countries, or all transactions and therefore is not the focus of this article.

The role of TP documentation in disputes

It is reasonable to expect that businesses may consider providing transfer pricing documentation to a tax authority to be the first line of defence in the event of a risk assessment, audit, or enquiry. Having robust documentation may be expected to:

  • Reduce the number of risk assessments that turn into audits or enquiries;

  • Reduce the amount of additional information that is requested by tax authorities;

  • Reduce the length of audits or enquiries; and/or

  • Provide protection against penalties.

However, despite more businesses preparing transfer pricing documentation in accordance with OECD requirements, evidence suggests that this is not resulting in fewer disputes, nor that businesses are getting all the potential benefits. Of course, part of the reason for this is a wider trend for increased scrutiny of transfer pricing but is there more that businesses could do contemporaneously and what are the advantages of doing this?

An interesting question is how do tax authorities view transfer pricing documentation and what can be learnt from transfer pricing disputes?

Tax authorities are sometimes not able to address their questions and concerns solely from the review of transfer pricing documentation and often ask for more granular detail in disputes. This may include broader ranges of interviews with the business, evidence of decision making (emails, meeting notes, etc.), and detailed profiles of employees, including detailed descriptions of any grading structure and staff numbers by grade.

It can be a significant challenge for businesses to gather and collate detailed additional evidence requested by tax authorities in the event of an audit or enquiry, often years after the fact, when key individuals may have moved on and the business may have markedly changed. In some cases, it is simply not possible to gather the evidence at a later stage, which may weaken the position of the business in defending its transfer pricing arrangements.

There may therefore be a benefit to businesses from doing more granular contemporaneous evidence gathering to be more robustly prepared for future enquiries, especially where the facts and circumstances are more complex.

Regional insights


The general trends of increased disputes and an increased evidential burden in the event of a dispute can be seen in many European jurisdictions.

In the wake of the BEPS recommendations, the UK did not originally formally adopt the requirement for businesses to prepare a master file and a local file, on the basis that the existing legislation was considered to sufficiently require businesses to be able to evidence that transfer pricing rules had been followed. In practice, many multinational businesses operating in the UK already adopt the OECD requirements to be consistent with other jurisdictions in which they operate.

However, following a 2021 consultation on UK transfer pricing documentation requirements, in July 2022 HM Revenue & Customs (HMRC) released draft legislation on new requirements, which are due to take effect for accounting periods beginning on or after April 1 2023. This legislation introduces the requirement in the UK for a master and a local file to be prepared in line with the format set out in the OECD guidelines, as well as a summary audit trail (SAT) that details the main actions taken in preparing the local file.

The twin objectives of the SAT, which will be in the format of a questionnaire, are:

  • To increase transparency over how a business has conducted its transfer pricing analysis in order to encourage compliance; and

  • To allow the UK tax authorities to assess the level of assurance the documentation provides so as to focus enquiries on higher-risk areas.

The UK tax authorities have also committed to providing guidance to help businesses to comply with the requirements, within the framework set by the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. However, the additional requirements do not go as far as the original consultation suggested they might.


Tax authorities in the Asia-Pacific region are also increasing their expectations regarding documentation and substantiation of related party transactions. The implementation of BEPS measures has been accompanied by an increased tax authority focus on transparency, which has resulted in many jurisdictions introducing compliance programmes that encompass documentation expectations beyond standardised transfer pricing documentation.

Large multinationals that are subject to the Australian Taxation Office’s (ATO’s) justified trust programme will be required to maintain transfer pricing documentation, lodge country-by country reports (which, perhaps confusingly, are a specific local Australian requirement rather than the OECD country-by-country reporting requirement), and provide additional objective evidence that would lead a reasonable person to the conclusion that the business has paid the right amount of tax.

Despite the ATO publishing guidance documentation in respect of certain categories of related party transactions, including financing arrangements and inbound distribution arrangements (PCG 2017/4 | Legal database and PCG 2019/1 | Legal database), the ATO’s Findings Report for the Top 100 Program, June 30 2021, states that transfer pricing remains a common assurance area and lists the adequacy of information available to support transfer pricing positions as a key issue.

It can be inferred that despite the introduction of increased reporting, the Australian experience is that the existence of additional documents and information does not correlate with a reduction in tax authority disputes.

The justified trust programme, and other similar programmes, involve a retrospective review of transfer pricing outcomes and a consideration of a business’ intention when undertaking related party transactions.

It has been observed that following a review of transfer pricing documentation, tax authorities will seek additional documentation that evidences critical decision-making processes and the commercial rationale that accompanies related party transactions. Tax authority enquiries of this nature are not typically addressed by standardised transfer pricing documentation.


The transfer pricing documentation requirements in the Americas region have also recently increased in breadth and depth. While the reports included in Action 13 of the OECD’s BEPS project have been widely adopted across the region, some countries have modified and expanded the scope of the reports for local documentation purposes, especially in the case of the local file requirements.

For example, Mexico has recently introduced legislative changes to expand the documentation rules to cover Mexico-to-Mexico related party transactions. In another change in line with the intention of the tax authorities to obtain more visibility on data that is usually limited in the case of a ‘one-sided approach’ to transfer pricing documentation, tax authorities will require information on the functions or activities, assets utilised, and risks assumed by the entity and related parties with which transactions are performed for each type of transaction.

These changes will not only cover the local file requirements but also other disclosure requirements that have become part of integral transfer pricing compliance in many countries across the Americas, especially in the Latin American subregion, such as informative returns or sworn declarations on transactions with related parties.

Alignment with the information included in the local file and that reported in the informative returns is part of the tax authorities’ routine checks when evaluating the transfer pricing risk profile of a business. Businesses must be aware that discrepancies in the data reported may lead to questions from the tax authorities, which may evolve into a full-scale audit or enquiry.

Furthermore, some countries require additional documentation if a transfer pricing analysis indicates that the business should make a transfer pricing adjustment. This documentation is subject to more-specific deadlines and requirements and usually covers other aspects beyond transfer pricing, such as customs compliance in the case of tangible goods and withholding taxes in the case of royalties.

Key takeaways for businesses

Many businesses have been navigating the increasingly complex transfer pricing documentation requirements for several years now. However, businesses that intend to utilise transfer pricing documentation as a first line of defence must address the developing focuses of tax authorities and learn from trends in disputes.

It is reasonable to expect that robust documentation that contemporaneously evidences subjective decision making and objective related party transaction outcomes will place businesses and tax authorities in the best position to engage efficiently and reduce the likelihood of initial reviews escalating to lengthy enquiries.

Businesses may want to consider whether they should seek to get ahead in an environment of increasing disputes by proactively gathering and documenting the type of granular evidence that is increasingly required in enquiries and taking advantage of the fact that this is far easier to do contemporaneously than years later.

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