What makes transfer pricing documentation contemporaneous?
Timing, and nothing else. The test is whether complete and accurate records existed by the filing deadline for the year they describe. A file assembled later can still be accurate, and it can still be useful in a discussion with an auditor, but it is not contemporaneous, because the records were not in place when the return went in. That distinction carries weight under section 247 because the documentation requirement operates as a penalty rule: records prepared by the deadline are what stand between an adjustment and a penalty on top of it. So the practical question is not how good the study is. It is when it was written.
Can we prepare the file after the CRA asks for it?
You can, and often you should, because the position still has to be explained. What you cannot do is treat it as contemporaneous documentation. Records prepared in response to a query no longer meet the contemporaneous test, whatever they contain. In that situation the work divides in two: explaining the pricing as it actually was in the year under review, and being straightforward about when the analysis was written. Pretending otherwise is worse than the gap, because the dates in a file are checkable. Where the deadline for a later year is still open, the sensible step is to get that year documented in time.
Does section 247 documentation prevent an adjustment?
No. Documentation is not a shield against a different view of the price; the authority can still reassess the arm's-length result. What the records affect is what comes after that. Because the documentation requirement works as a penalty rule, complete and accurate records prepared by the filing deadline are what separate an adjustment from an adjustment with a penalty added to it. Groups sometimes decide documentation is not worth preparing because they expect to win the pricing argument. That reasoning misses what the file is for. It insures the consequence, not the outcome.
What do we have to write about the method we used?
Not just its name. The records have to set out the method chosen and the reasons for choosing it, together with the comparables relied on. In practice that means the file describes what the transaction is, who the participants are, what functions each performs and what risks each carries, and then shows why the method follows from that description rather than from convenience. A file that states a method and attaches a benchmarking search, with nothing connecting the two, leaves the reader to reconstruct the reasoning. The reasoning is the part being tested.
Do we need to describe functions and risks or just the price?
Both. The records must describe the property or services, the terms agreed, the participants, and the functions and risks each of them takes on. The price sits at the end of that chain and is hard to defend without it. This is the part of a file that cannot be produced from the accounting system, because it comes from the people who run the business: who negotiates, who carries inventory, who bears a warranty claim, who decides what gets made. Gathering that while the year is fresh is also why contemporaneous preparation is easier than reconstruction.
Do we have to redo our documentation every year?
The requirement attaches to each year and so does the deadline, so a file describing an earlier year is not contemporaneous documentation for this one. That does not mean starting from a blank page. Where the transactions, the participants and the functions have not changed, the description carries forward and the work is confirming it still matches what happened, then refreshing the financial results and the comparables. Where something did change, such as a new intercompany charge, a moved function or a renegotiated term, that is the part which needs writing, and it is the part an auditor looks for first.
What is country-by-country reporting?
A report that the largest multinational groups file with their home authority, setting out revenue, profit, tax paid and accrued, capital, employees and tangible assets for every jurisdiction they operate in. It is exchanged between authorities and used for risk assessment, not to compute tax. Its effect on the ground is that inconsistency between the report, the local files and the statutory accounts is itself what draws attention. See our transfer pricing work.
What are the transfer pricing methods?
Five, in two groups. Three compare transactions: comparable uncontrolled price, resale price, and cost plus. Two compare profits: the transactional net margin method, and profit split. The OECD asks for the most appropriate method on the facts rather than a fixed hierarchy; the United States applies a best-method rule to similar effect. Selection is itself a documented judgment, and a method chosen without recording why is a weak position under audit. See our transfer pricing work.
