Transfer pricing documentation, also known as „Transfer Pricing Documentation“, is an important part of tax compliance for companies with international business dealings. It serves to demonstrate that the prices charged for transactions between associated companies are arm’s length.

Transfer prices are the prices at which transactions between associated companies (e.g. subsidiaries) are carried out. They must be appropriate, i.e. realistic and justifiable. This is intended to ensure that profits are distributed fairly amongst the associated companies. Otherwise, companies could avoid paying tax by artificially shifting profits.

Transfer pricing documentation contains detailed information on the business relationships between the associated enterprises, the nature of the transactions carried out, and the appropriate transfer prices. It should also set out the method used to determine the arm’s-length transfer prices, as well as the supporting documentation used to substantiate that method.

There are various methods for determining appropriate transfer prices, including the comparable uncontrolled price method, the profit margin method and the transaction method. The choice of method depends on the nature of the transactions and the availability of comparable data.

It is important to note that transfer pricing documentation is not prepared solely for tax purposes. It also serves as evidence for the tax authorities that arm’s-length prices have been used. Companies must therefore ensure that their transfer pricing documentation is accurate and complete in order to avoid potential tax risks.

In some countries, there are legal requirements regarding the preparation and retention of transfer pricing documentation. Companies must comply with these requirements. It is therefore important to find out separately about the applicable legal requirements in the countries in which the company operates.

Transfer pricing documentation must be prepared and retained by companies that carry out cross-border transactions with associated enterprises. Associated enterprises are enterprises that are economically dependent on one another, such as subsidiaries, sister companies or enterprises controlled by the same owner.

As a general rule, companies registered under the German Commercial Code (HGB) or the Publicity Act (PublG) are required to prepare and retain transfer pricing documentation. These companies are generally of a certain size and have complex business structures.

Sometimes, even smaller companies or partnerships are required to prepare transfer pricing documentation when they carry out transactions with associated companies. You should also bear in mind that, in some cases, transfer pricing documentation is required for certain actions to be legally valid, for example when incorporating a limited liability company (GmbH) or when making changes to the commercial register.

The Opti.Tax Transfer Pricing Documentation software solution was developed in collaboration with the transfer pricing team at the Düsseldorf-based law firm ADKL, led by Lisa Hägele and Tobias Polka.

The result of this collaboration: a uniquely user-friendly, well-designed software tool for documenting transfer pricing.