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Documentation
–W
hy t
ake t
he T
rouble
??
•Because you have to -i.e. legislation
(Sec 92D read with Rule 10D)
•To be prepared for a Transfer Pricing assessment
•As a contemporaneous record
•To demonstrate how pricing decisions were made
•To show that you did adopt arm
’s length principle
•To eliminate/ minimise penalties
Indian TP Regulations and OECD
recommendations
•Extensiveness of documentation process to be determ
ined
by prudent business management principles
•Greater the complexity & unusualness of the case, the more
significance will attach to documentation
•Key considerations:
•Nature and term
s of the transaction
•An outline of the business (financial or otherwise)
•Management strategy, market penetration strategies
•Organisation structure
•Ownership linkages within the group
•Factors influencing the setting of prices
•Special circumstances
•Business environment / trends –competition, technology, etc.
•Functions, assets, risks
Objectives
•At a high-level, objective or purpose of a documentation
can be viewed along a spectrum
•Significant differentiating aspects
•Not interchangeable but planning documentation can be
converted into compliance documentation
•Im
plementation aspects
Design and planning
documentation
Compliance
documentation
Exe
cutiv
esu
mm
ary
Indu
stry
anal
ysis
Com
pany
anal
ysis
Inte
rcom
pany
tran
sact
ions
Fun
ctio
nal
anal
ysis
Eva
luat
ion
of m
etho
ds
Eco
nom
ican
alys
is
Con
clus
ions
Doc
umen
tatio
nF
low
Sources
•Company inform
ation
•Financial statements
•Corporate entity structure charts
•TP policy
•Intercompany agreements
•Industry research
•Investment banker reports
•Market research, university studies, industry reports from government
agencies or industry bodies
•Websites
•Newspaper or journal articles
•Functional analysis
•Interviews
It’s important to connect all these and build a story!
Getting started
Executive summary:
•Summarise key elements
•Objective
•Scope
•Conclusions
•Im
portant to first identify conclusions
one would like to reach based on facts
of each individual case
•Develop remainder of document to
reach those conclusions
•Each section leads to the next
•List conclusions a provide link to show
how those conclusions were reached
Indu
stry
Ana
lysi
s
Com
pany
Ana
lysi
s
Inte
rcom
pany
Tra
nsac
tions
Fun
ctio
nal A
naly
sis
Eva
luat
ion
of M
etho
ds
Eco
nom
ic A
naly
sis
Con
clus
ions
Industry analysis –what’s this?
•Provides reader with description of industry in which the
company 0perates
•Focus on those industry factors which have the greatest
effect on company’s profitability
•Listen to operational personnel as to which factors they
consider most important and review the research,
highlighting areas which are most supportive or
demonstrative of company’s case
•Make sure focus is on competitive conditions faced by the
company
Industry analysis –contents
Overview
Background
•Products
•Structure
•Market segmentation
Market overview –focus on relevant industry
and market trends
Main competitors –discuss where the company
falls within competitive makeup, compare
financial successes and failuresfir
st d
escr
ibe
broa
d pa
ram
eter
s, th
en fo
cus
in
mor
e de
tail
on th
e co
mpa
ny’s
ba
ckdr
op
Industry analysis –contents (contd.)
Key drivers
of profitability
Analyse industry profitability
Discuss factors that explain differences in
profitability
Risks
Identify and define individual risks by considering
key drivers of profitabilityand the items that affect
them
Critical
success
factors
Describe those capabilities that companies must
have to respond to industry trends and structures.
This section will be used in the company analysis
to analyse the company’s own core competencies.
Industry analysis –contents (contd.)
Key
conclusions
for TP
Goal of this section is to set the stage for
future analyses
Aim at establishing a link between industry
analysis and what is to come later in the
report
Depends on what it is important to highlight
for the company
Summarise most important points for
influencing further conclusions
Company analysis –what’s this?
•Provides reader with a background of the company,
placed in the context of the transactions
•Prepared to understand legal & business structure /
operations of the company
•Objective is to describe the group’s:
•Competitive and corporate strategy
•Financial perform
ance
•Strengths and weaknesses (SWOT analysis?)
•Legal structure
•Make use of major points identified in industry analysis
Company analysis –contents
Background
•History
•Corporate strategy
•Vision / mission statement
Business overview
Financial perform
ance –
describe over time
Overview
Company analysis –contents
(contd.)
Core
competencies
Few skills that the company possesses to a greater
extent than most others (may be identified in
relation to industry critical success factors)
Discuss company’s strengths and weaknesses
relative to immediate competitors
Company’s profitability compared to its strategic
group / sector
Key
conclusions
for TP
Intercompany transactions –what’s
this?
•Provides a description of intercompany transactions
under review
•Pricing policy and intercompany agreements
•Aggregation of transactions
Intercompany transactions –
contents
List
transactions
Provides clarity on which transactions have been
analysed
Aggregation
of transactions
Discuss whether appropriate to consider
transactions one by one or on a grouped basis
(whole entity?)
TP policy
Describe the company’s TP policy document (if
any)
Term
s and conditions that apply to transactions
Intercompany agreements / contracts
Functional analysis –what’s this?
•Describes functions perform
ed, assets utilised & risks
borne by each transacting entity
•Analyses how company manages its core competencies,
critical success factors& risks
•Examines how conclusions reached in industry &
company analysestranslate into specific activities
undertaken by the company
•Basis for entity characterisation
Functional analysis –process flow
Org
anis
atio
n st
ruct
ure
a)M
anag
emen
t
b)O
pera
tions
c)S
uppo
rt
Rol
es &
Res
pons
ibili
ties
a)M
anag
er (
Tre
asur
y) –
resp
onsi
ble
for
hedg
ing
risks
b)S
taff
(Res
earc
h) –
resp
onsi
ble
for
spec
ific
task
s th
at fo
rm p
art o
f des
igni
ng
and
deve
lopi
ng n
ew p
rodu
cts
Act
iviti
es
a)T
reas
ury
incl
udes
cas
h an
d ris
k m
anag
emen
t, he
dgin
g, f
inan
cing
, fo
reca
stin
g an
d in
sura
nce
b)R
&D
incl
udes
gen
erat
ion
of
inno
vatio
ns,
prod
uct i
mpr
ovem
ents
, ad
vanc
es in
man
ufac
turin
g pr
oces
ses,
et
c.
Fun
ctio
ns
•T
reas
ury
•R
esea
rch
& D
evel
opm
ent
a)In
dust
ry
Ana
lysi
s
b)C
ompa
ny
Ana
lysi
s
c)In
ter-
com
pany
Tr
ansa
ctio
ns
Ass
ets
a) T
angi
bles
b) In
tang
ible
s
Ris
ks
Bus
ines
s fa
ctor
s th
at m
ay e
xpos
e co
mpa
ny t
o po
ssib
ility
of l
oss
/ dam
age
–m
arke
t ris
k, w
arra
nty
risk,
cre
dit r
isk,
etc
.
Fun
ctio
nal
Ana
lysi
s
Functional analysis –contd.
•Functions / Assets / Risks can be summarised by way of
a chart showing the contribution of each party
•Overview of economically relevant contributions made by
each entity, key perform
ance indicators and assets
contributed
•Summary of contributions helps in entity characterization
•Entity characterization important in finding out the
“simpler party”
•Simpler party typically leads to conclusion on choice of
tested party
Economic analysis –what’s this?
•Summarises evaluation of TP accepted methodology,
comparable search process and results of benchmarking
analysis
•Choice of most appropriate methodology is based on FAR
•Choice of tested party
•Which PLI should be applied?
•Core benchmarking consists of searches perform
ed on
databases to arrive at a list of comparable independent
companies
•PLI is applied to comparable companies’ financials
•Economic adjustm
ents may need to be perform
ed to
enhance comparability
Economic analysis –process flow
Ent
ity C
hara
cter
izat
ion
Cho
ice
of T
este
d P
arty
Fun
ctio
nal A
naly
sis
•F
unct
ions
•R
isks
•A
sset
s
Arm
’s le
ngth
ran
ge o
f res
ults
??
Eco
nom
ic A
naly
sis
•S
elec
tion
of M
ost A
ppro
pria
te M
etho
d
•B
ench
mar
king
Fin
anci
al A
naly
sis
•P
rofit
Lev
el In
dica
tor
•M
ultip
le y
ear
/ dat
a av
aila
bilit
y
Conclusions –what’s this?
•Provides the findings of each section of the report
•Analyzes how these conclusions were reached
•Comment on whether the objectives of the report have
been met
Takeaways
•Build a TP story
•Understand the issues
•Connect the dots / Make the complex
understandable
•Speak easy language
•Seek a fresh perspective
Takeaways
The R
evenue w
ill never u
ndersta
nd y
our
busin
ess a
s w
ell a
s y
ou -
but
if y
ou f
ail t
o
expla
in y
our b
usin
ess a
nd p
ric
ing in e
asy
“la
nguage”, you w
ill encounte
r o
ngoin
g
expensiv
e d
iffi
cult
ies.