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Transfer Pricing

Why Gamble with TP Documentation When You Can Show Tax Authorities Your Best Hand?

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If you’ve ever played poker, then you must be familiar with the art of the bluff: You hold a beatable hand, but you act like you’re holding a royal flush. You project a daringly neutral face, and instead of contemplating all that you have to lose, you boldly raise, in hopes that your opponents will be the ones to fold.  

While the bluff may be an admirable skill around the card table, faking it is never a wise move when you’re dealing with tax authorities. For tax executives saddled with transfer pricing documentation, however, it’s a tempting one. After all, TP documentation (local file and master file)—not a task many tax executives enjoy—often falls way down on the to-do list.  

Am I right?  

But that “low priority” task can be a gamble that really costs you. While the contemporaneous preparation of TP documentation is often a requirement, submission of those reports is only necessary if tax authorities request it. And like deft poker players in a late-night round, many tax professionals are willing to take their chances with what they’re dealt and bet that their documentation won’t be summoned at all.  

That thinking may be much riskier than you realize. Why? First of all, timing. You may not have enough time to prepare the required TP documentation if and when tax authorities come knocking. Usually, there’s only a 30-to-60-day window or even less.    

“I can manage it,” you think.  “I can prepare it within the timeline.” Are you sure? Unexpected challenges always crop up—and if tax authorities call your bluff, you’d be forced to show a losing hand.  

The situation gets even more complicated if you’re obligated to prepare a local file within the statutory deadline and you stated that you had it ready, but really didn’t. There are penalties—sometimes even criminal charges—if reports are not ready within statutory deadlines and you’re caught having made a false statement. 

“I don’t care about penalties,” you say.  Well, you may care that being penalized can put you in the spotlight with other tax authorities. Are you “Keen” with being on the blacklist? (We’ll dig into that in another blog, where we will check out Elizabeth’s Keen story regarding the Blacklist.)  

Then are those instances, where you just can’t fake it at all. In certain countries, you’re actually obligated to submit a local file and/or master file on an annual basis. For instance, if you have TP arrangements in Denmark, Latvia, Chile, Mexico, South Korea, Egypt, South Africa to name just a few jurisdictions, you may need to submit a local file. And by the way, the number of “library” countries is growing, and we expect more to introduce the same statutory submission requirements that others already have in place. 

The good news is, unlike a game of poker, transfer pricing documentation doesn’t require luck to come out ahead. You have complete control over your hand—you just have to take it. If you put sufficient time, effort, and planning into transfer pricing documentation, you can leave the art of the bluff where it belongs—at the card table.