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The PATA members, which include Australia, Canada, Japan and the United States, are providing principles under which taxpayers can create uniform transfer pricing documentation ("PATA Documentation Package") so that one set of documentation can meet their respective transfer pricing documentation provisions. Use of this PATA Documentation Package by taxpayers is voluntary and does not impose any legal requirements greater than those imposed under the local laws of a PATA member. In this regard, it should be noted that each PATA member has different legal systems, statutes, regulations and administrative approaches with respect to transfer pricingi. The PATA members, after reviewing their respective domestic laws regarding transfer pricing and documentation of controlled transactionsii , agree that a multinational enterprise ("MNE") will satisfy each PATA member's documentation provisions by complying with all of the principles contained in this PATA Documentation Package, and will thus avoid the imposition of the PATA members' transfer pricing penaltiesiii with respect to the documented transactions among associated enterprises resident in PATA member jurisdictions. However, satisfaction of the principles of this PATA Documentation Package does not preclude PATA member tax administrations from making transfer pricing adjustments, and assessing any interest due on those adjustments.
This PATA Documentation Package responds to the potential difficulties that MNEs face in complying with the laws and administrative requirements of multiple tax jurisdictions. MNEs may face significant and potentially costly duplicative administrative requirements in order to meet the transfer pricing documentation standards of the different jurisdictions. By providing taxpayers with the option of applying this uniform documentation package, the PATA members intend to assist taxpayers to efficiently prepare and maintain useful transfer pricing documentation, and timely produce such documentation upon request to PATA member tax administrations while precluding any related transfer pricing penalties. It is considered that this documentation package is consistent with the general principles outlined in Chapter V of the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations ("OECD Guidelines").
Taxpayers that choose to use the PATA Documentation Package in order to avoid the imposition of PATA member transfer pricing penalties with respect to a transaction need to satisfy three operative principles. First, MNEs need to make reasonable efforts, as determined by each PATA member tax administration, to establish transfer prices in compliance with the arm's length principle. Second, MNEs need to maintain contemporaneous documentation of their efforts to comply with the arm's length principle. Third, MNEs need to produce, in a timely manner, that documentation upon request by a PATA member tax administrator. These three operative principles are more fully explained below.
The first principle is that taxpayers need to make reasonable efforts to establish their transfer pricing in accordance with the arm's length principle. Such efforts include, but are not limited to, analysis of controlled transactions, searches for comparable transactions between independent enterprises dealing at arm's length, and selection and application of transfer pricing methods that are reasonably concluded to produce arm's length results in accordance with applicable PATA member transfer pricing rules and the relevant treaty, consistent with the OECD Guidelines.
The second principle is that taxpayers need to reasonably and contemporaneously document their efforts to comply with the arm's length principle. Contemporaneous documentation helps taxpayers and tax administrations in the examination process by giving taxpayers notice of information needed to assess whether prices of controlled transactions comply with the arm's length principle. Such documentation also provides tax administrations with useful analysis of controlled transactions between associated enterprises and assists in minimizing controversies over potential transfer pricing issues. Documentation is contemporaneous if it is existing or brought into existence no later than the due date, under the relevant PATA member's rules, of a timely filed (taking into account extensions allowed by the PATA member) income tax return for the taxation year of the controlled transactions at issue (and includes relevant information through such date).
The attached scheduleiv describes the documentation for purposes of satisfying the second operative principle of the PATA Documentation Package. An analysis under the arm's length principle is generally based on information about the associated enterprises involved in the controlled transactions, the transactions at issue, the relevant functions, assets and risks, and information derived from independent enterprises engaged in similar transactions or businesses. A taxpayer needs to prepare and maintain the documentation for transactions or arrangements between itself and an associated enterprise resident in another PATA member jurisdiction, as necessary to demonstrate compliance with the arm's length principle. Transfer pricing documentation prepared and maintained pursuant to this PATA Documentation Package needs to be adequate and of sufficient quality so as to evidence that the taxpayer reasonably concluded that it selected and applied a transfer pricing method that produced an arm's length result in accordance with applicable PATA member transfer pricing rules and the relevant treaty, consistent with the OECD Guidelines. In evaluating the quality of an MNE's documentation, each PATA member tax administration will take into account all the relevant facts and circumstances, which for example may include: the extent to which reliable data was reasonably available and analysed in a reasonable manner and the significance, importance and complexity of the taxpayer's transfer pricing issues.
Additional information not listed on the attached schedule may be requested by a PATA member tax administration as necessary to examine an MNE's conclusions as to the arm's length nature of its arrangements.
The third general principle is that taxpayers need to timely produce the foregoing documentation upon request by a PATA member tax administration in order to benefit from the penalty protection afforded by this Package. Upon request by a PATA member tax administration, documentation needs to be provided to a tax administration in accordance with each PATA member's respective rules, if any, on timely production of documentation. A PATA member may request a PATA Documentation Package only to the extent it relates to transactions involving that jurisdiction, and as provided by each PATA member's domestic laws and relevant treaty. It is usually in a taxpayer's interest to provide this documentation to the tax administration early in a transfer pricing review or audit as it will assist in demonstrating whether its transfer pricing is appropriate for tax purposes. The confidentiality of the information submitted by taxpayers will be safeguarded in accordance with the usual treaty and domestic laws regarding disclosure.
To avoid the imposition of PATA member transfer pricing penalties, the taxpayer needs to maintain and upon request, produce in a timely manner, documentation of sufficient quality so as to accurately and completely describe the transfer pricing analysis conducted by the taxpayer and the efforts to comply with the arm's length principle. The list of documents below is considered to be exhaustive. That is, it includes all documents that the PATA tax administrations view as necessary in order to provide transfer pricing penalty relief under this package. However, it is recognized that in certain instances, some of the documents below would not be needed. For example, where a taxpayer is not involved in a Cost Contribution Arrangement or market share strategy, it follows that the documents relevant to such arrangement or strategy are not needed.
Nature of the business/industry and market conditions
Assumptions, strategies, policies
Cost contribution arrangements (CCA)v
Comparability, functional and risk analysis
Selection of the transfer pricing method
Application of the transfer pricing method
i For example, PATA member laws incorporate guidance on transfer pricing documentation consistent with Chapter V of the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations ("OECD Guidelines") in different manners, some by reference to the prudent business management principles under section 5.4 of the OECD Guidelines, others through an evaluation of whether documentation maintained is of sufficient quality to establish that a taxpayer reasonably concluded its transfer pricing is in accordance with the arm's length principle, others by both.
ii Changes to this Documentation Package may be necessary to reflect future changes to the transfer pricing documentation provisions of PATA members. Any such changes to the Documentation Package would be agreed by PATA members and made publicly available on or before the date on which the revised Documentation Package takes effect. If a PATA member determines that it must withdraw, either temporarily or indefinitely, from this agreement because a consensus on changes cannot be reached by the time required by the domestic provisions concerned, that PATA member will notify other PATA members of its withdrawal and issue a public notice thereof on or before the effective date of that withdrawal.
iii Australia, Canada and the United States have transfer pricing-related penalties that may be excused based on documentation that meets these PATA Documentation Package principles. The term transfer pricing penalties refers to the following penalties:
iv The schedule is divided by documentation headings. The headings are intended to group the documentation into areas or categories of the transfer pricing analysis to which the specified documentation relates. The order of the headings is in no way representative of the importance to be assigned to a particular heading.
v The current Japanese and Australian tax law does not provide specific treatment for CCA.