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28. May, 2024

Transfer pricing: What must be included in the documentation

Transfer prices are the prices at which related parties charge each other for transactions (services, goods, intangible assets, loans, etc.). Related parties can be domestic or foreign legal entities that are linked, either through ownership or management, either directly or indirectly, with at least a 25 percent stake.

Determining Transfer Prices

For effective transfer pricing, it is crucial that prices are set according to principles that would apply to transactions between two unrelated parties. This means that the price must be set based on the arm’s length principle. Taxpayers who carry out transactions with related parties must ensure the proper setting of transfer prices and also provide appropriate documentation. This applies regardless of whether the transactions are domestic or international.

When assessing the appropriateness of transfer prices, various specific circumstances must be considered. Usually, a market analysis is conducted for price comparison and fairness evaluation, which includes a comparison with a database of similar transactions. This analysis helps determine whether the transfer prices are in accordance with market conditions.

Preparing Transfer Pricing Documentation

The appropriateness of transfer pricing compliance is described in the documentation on transfer prices. Documentation on transfer prices must include both a general part (Masterfile) and a specific part that is country-specific (Country-specific file).

The complete documentation includes:

  • information about the company,
  • about related parties,
  • the scope and type of transactions performed,
  • and the methodology for determining comparable market prices.

A particularly important element of this documentation is the functional analysis. Functional analysis, which serves as a basis, is crucial for selecting the most appropriate method for determining the transfer prices of individual transactions. It also considers the actual circumstances, including the specific activities of the companies and the nature of the transactions conducted.

It is legally prescribed that the documentation on transfer prices must be prepared no later than the date of submission of the annual tax return. This requirement ensures that all transactions between related parties are not only properly documented but also fully compliant with the law.

Experts from Unija Consulting can prepare the documentation on transfer prices for you. Contact us HERE and book a consultation with a tax expert.