What is the difference between a defence file and my transfer pricing report?
The report states the position. The file is the evidence behind it. A documentation report explains the method, the comparables and the conclusion; a defence file holds the emails, the time records, the board minutes and the invoices that show the conduct actually matched the policy the report describes. Auditors rarely dispute that a report exists. They ask whether the business ran the way it says. That question is answered out of the file, and if the file was never assembled, it is answered by whatever the group can find under time pressure.
An auditor has asked for our transfer pricing records, so what do they want?
Beyond the report itself, they want the material that corroborates it. Who did the work, where those people sat, what they were paid for, what was agreed and when, whether the invoices follow the agreement, whether the agreement follows what anyone actually did. If the file exists, answering is a document delivery. If it does not, it becomes a reconstruction carried out against a deadline, usually by people who were not there at the time, and the gaps found in that exercise are the same gaps the auditor will find.
How do I prove that we followed our own transfer pricing policy?
With records created at the time, not explanations written afterwards. A cost-plus service charge is supported by time records and a description of what the staff did. An intercompany loan is supported by the minutes of the decision and the evidence of the terms being observed. A distribution margin is supported by the pricing decisions and the correspondence around them. None of this is exotic material; it is ordinary business documentation that becomes hard to obtain once the people have moved on and the systems have been replaced.
Should I build the defence file before an audit or wait to be asked?
Before, for two reasons that have nothing to do with being tidy. First, the response to an enquiry becomes a delivery of documents rather than an investigation into your own past, which changes both the cost and the tone. Second, assembling the file tells you where your position is weak while you can still do something about it — re-paper an arrangement, correct an invoicing basis, or decide what a realistic settlement looks like. A weak point you have already identified is a negotiating position. Found by an auditor, it is a finding.
What records should we be keeping for intercompany charges?
Keep what shows the conduct, not just the conclusion. The intercompany agreements and any variations, the invoices and the basis on which they were calculated, time or activity records for services, board and management minutes for decisions such as funding or a change of function, and the correspondence in which the commercial terms were discussed. Keep them against the year they belong to, so that a later request can be answered by year. The habit matters more than the volume: material collected as it arises is material you still have.
What do I do if the file shows our policy was not followed?
Deal with it while it is still your own discovery. The usual findings are mundane: invoices raised on a superseded basis, a function moved without the agreement changing, a charge nobody can evidence. Each has a response — correcting the intercompany accounts, re-papering the arrangement to match what is actually done, or dropping a charge that cannot be supported. Doing that before an enquiry converts a contested adjustment into a corrected position. It also lets you judge what a settlement should look like, rather than reacting to a number someone else has put on the table.
What is the difference between a master file and a local file?
The master file describes the group as a whole — its structure, where value is created, how intangibles and financing are held. The local file covers one entity's own related-party transactions in detail, with the analysis supporting each price. Larger groups file both, plus country-by-country reporting above a size threshold, and the thresholds differ by country. See master file vs local file.
What is the arm's length principle?
The standard that a transaction between related parties should be priced as it would have been between independent ones dealing at arm's length. It is the test every major transfer pricing regime applies, and it is evidenced by comparison — finding independent transactions or companies genuinely similar in function, risk and assets, then showing your pricing falls within the range they produce. That comparison is what a benchmarking study documents. See benchmarking study.
