Transfer pricing documentation - is it ready for submission to the SRS?

Some of the financial managers can take a breath – a season of annual financial audits finally is over, and the reports have been submitted. It's time now to relax and go on vacation! However, not everyone has such a positive view on the nearest future, because of the deadline that is approaching when certain taxpayers are obliged to submit, or the State Revenue Service (SRS) has the right to demand the submission, of transfer pricing documentation for transactions with related parties. We've already informed our clients about these obligations here: https://www.orients.lv/en/expertise/transfer-pricing/. 

Therefore we advise the companies that have transactions with related parties to not lose time and to start preparatory works now. To have a timely approach is necessary as it is practically impossible to prepare high-quality documentation from scratch within a month when the task becomes urgent. It is important to note that the deadline for submission of the documentation is not possible to extend, as there are no legislative rights for SRS to extend these deadlines. As an additional constraint, if not planned ahead, there could be a work overload of the transfer pricing specialists at a certain moment.

Does the investment of resources in the preparation of transfer pricing documentation has added value?

Taxpayers often perceive this obligation as an unavoidable evil that requires the investment of financial and time resources from the company, without an obvious return. In addition, the requirements for documentation become more and more complicated over time, creating the need to at least partially involve specialists who know this field in the development of the first projects.

Although the opinions on this question could be different, in general, the investment of resources in these projects definitely pays off. First of all because the existence of documentation significantly reduces the risk of additional tax obligations and fines for the company, which has significantly increased in relation to transactions with foreign related parties in recent years, due to the introduction of new requirements and SRS’s upgraded control processes. In addition, by starting the preparation of the documentation from scratch, the company's specialists and management have the opportunity to evaluate the sales and pricing processes in the company and compare the appropriate prices with the prices applied by independent entrepreneurs in comparable conditions. Likewise, the company's specialists, who participate in or prepare the documentation in whole or in part, obtain useful experience.

Of course, the situation of each company is different and depends on how transfer pricing issues are handled within the group of companies. It can be organized centrally or decentralized in the group, and if there is a person responsible for transfer pricing documentation or a separate team in the group of companies, it is important to understand whether the transactions of the Latvian company have already been analyzed in another project and how relevant is this information. On the other hand, if it is known that the group has not had transfer pricing documentation so far, but it is clear that it will have to be submitted on a mandatory basis, it is time to initiate the preparatory process immediately.  

Can the company itself prepare transfer pricing documentation without involving external service specialists?

The answer is yes and no, as the devil as always is in the details. It depends on the type of related party’s transactions and whether the company has the necessary internal resources (knowledge and experience) to complete the task. If the company's specialists have knowledge of how to prepare high-quality documentation, explain the commercial principles of pricing, and define the most suitable transfer pricing method, then for some companies, the answer might be affirmative. However, do the company's specialists have time to deal with the preparation of documentation within the deadline defined in the regulatory acts? As it is known, the structure of the documentation consists of the descriptive part, including the company’s, industry’s, and functional analysis, as well as the economic analysis, which includes the study of comparable data - internal or external. If there is knowledge and capacity, the company's specialists can prepare a large part of the transfer pricing documentation independently. However, data analysis often requires specific data from commercial databases that can only be obtained for a fee and a specialist must have experience and knowledge of the appropriate principles of data selection. As companies usually do not separately purchase access to these special commercial databases due to those high-cost levels, it will not be possible to achieve a good result without outsourcing this task to a greater or lesser extent. 

Outsourcing - possible cooperation models

Should the company has all the necessary resources for the independent preparation of transfer pricing documentation, it is possible to agree on the involvement of a transfer pricing specialist from outside to support in the fields where it is needed. For example the specialist could be attracted to review the project, solve technical issues, extract data from commercial databases and analyze them, establish best practices and transfer knowledge to the company's internal team.

In case the company does not have sufficient internal resources, the preparation of the documentation is performed by an external service provider. The company's finance or tax team in this case usually manages the preparation process, organizes functional interviews, provides the necessary information, reviews the drafts, and agrees on the final versions. At the same time the outsourced  service provider conducts functional interviews, prepares documentation projects and final documentation according to the received information and selects comparable data. In practice, there are also various hybrid variants for cooperation in the preparation of documentation, and there is always the possibility of agreeing on the optimal cooperation model.

To discuss cooperation models we provide for the preparation of transfer pricing documentation, please contact Orients Audit & Finance Tax project manager and the author of this article, Ina Spridzāne, at ina@orients.lv. 

You can also find more tax-related news here: https://www.orients.lv/en/expertise/tax-consultations/, or information on the Binding ruling of the State Revenue service here: https://www.orients.lv/en/expertise/vid-uzzina/