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Transfer Pricing

How Far Should You Go with your FAR?

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Recently I was reviewing a transfer pricing report where the transaction was outlined as providing business development, corporate development, and scientific services to a sister company. Within the functional analysis, areas covering the usual administrative functions were described, with modest risk assumed by the tested party (Accounts Receivable being a regular risk for any company) and only customer lists and contract negotiation as assets.

To begin with, the presence of scientific services as part of a general administrative service transaction is out of place and would in all likelihood cause an agent to want to engage in a more detailed investigation as to the actual activity by the entity. By its very presence in the transaction description, it would invite inquiry as this is not a general white-list item.  And when you complete a FAR analysis and do not include any aspect that resembles “scientific services,” it only further stokes the curiosity of an examiner.

When constructing a report, care should be given to the transaction description to avoid including information that will de facto exclude the intended treatment of the transaction. Likewise, in construction of the FAR analysis, one should take care in the selection of items for both inclusion and exclusion to support the activity under consideration. Inclusion of items that run contrary to the described transaction will only work to your detriment and force the examiner to delve into the transaction for better detail and description. Similarly,  providing a very perfunctory FAR can lead to more questions and possibly a blanket rejection of the report if it’s viewed as too vague and lacking a good faith effort at compliance.

Ideally, one should strive to be as specific as possible using simple, easily understood transaction descriptions that inform without offending the examiners’ sensibilities. One needs to include those activities that are generally understood to be integral parts of the transaction as opposed to adding superfluous activity that only serves to cloud the view of the transaction.