Related-party transactions remain a focus area in tax reviews. Corvane's tax specialists outline six steps that help businesses get their documentation, data and arguments in order before they are asked to explain them.
For businesses within multinational groups, transactions with parent companies, sister entities and other related parties happen every day: purchases of materials, sales of finished goods, support service fees, royalties and intra-group loans. Transfer pricing rules require these transactions to follow the arm's length principle and to be supported by documentation. When a review comes, the difficulty is rarely a lack of data; it is that the data is scattered and the arguments have not been prepared in advance.
1. Map every related-party transaction
List all related parties, transaction types, annual values and the corresponding contracts. In practice, items such as management fees, IT cost allocations or intra-group guarantees are often missed because they do not pass through procurement.
2. Compare contracts with actual conduct
A contract may describe the business as a low-risk contract manufacturer while in practice it carries its own inventory and finds its own customers. That gap invites questions. The functions, assets and risks described in the documentation must match how the business actually operates.
3. Review multi-year results
Persistent losses or thin margins over several years while the wider group grows are usually a signal that will need explaining. Prepare a specific analysis of the causes: an investment phase, under-utilised capacity, exchange rate movements or start-up costs.
4. Refresh comparable data
The set of comparable companies should be updated regularly, with clear screening criteria. Outdated data or inconsistent selection criteria can weaken the credibility of the whole file.
5. Standardise support for intra-group service fees
- Evidence that the services were actually provided: reports, email exchanges, meeting minutes.
- The benefit the business received from the services.
- The cost allocation basis and the mark-up applied.
6. Appoint a lead contact and prepare the narrative
Choose someone who understands both the numbers and the business to work with the review team, and prepare a set of likely questions with evidence-backed answers. Prompt, consistent responses help meetings run more smoothly.
“Good transfer pricing documentation is not the thickest file; it is the file that tells the business's real story, backed by data and evidence. Preparing early lets a business go into meetings with the tax authority with far more composure.” — Mr Ly Gia Hung, Partner, Tax Advisory, Corvane Advisory
Every business has its own transaction structure, so these steps should be tailored to its circumstances. The outcome of any review depends on many factors, but well-prepared documentation is always the foundation for presenting the business's position clearly and with support.
When to start
The best time is right after the financial year is closed, while the data is fresh and the people involved still remember the context. Businesses can allow four to six weeks to complete these steps and then update them annually rather than starting from scratch.
