Transfer pricing documentation

This guidance will be updated.

The purpose of transfer pricing documentation is to show that the related party transactions are in accordance with the arm’s length principle. A good transfer pricing documentation is such that after having read it a person, who does not know the company before, should understand how the functions, assets and risks are shared between related parties in each related party transaction.

Why is transfer pricing documentation compiled?

Transfer pricing documentation is a document compiling the transactions between companies belonging to the same group and the dealings between a company and its permanent establishment. The purpose of a transfer pricing documentation is to show that transfer pricing has been in accordance with the arm's length principle, which means that the terms and conditions applied in related party transactions have been identical with those that would have been applied also between independent enterprises.  

The transfer pricing documentation is compiled following the separate entity approach. This means that a related party is viewed as operating as a separate entity that is independent of the group and not as an inseparable part of a single unified business. Provisions on transfer pricing documentation are contained in the Act on Assessment Procedure.

How does a company benefit from the documentation?

High-quality transfer pricing documentation is the best means for an international company to avoid unnecessary adjustments and misconceptions that may arise in the tax control carried out by tax authorities in different countries. A company may significantly lower the risk of transfer pricing adjustments conducted afterwards and thus, the risk of international double taxation by compiling a thorough documentation for each tax year.

In connection with compiling the documentation, the related party transactions are identified and the decisions concerning their transfer pricing made in a controlled manner. Compiling the documentation may also help the company to construe the intra-group transactions and the functions related to them in a better manner.

It is recommendable to compile the transfer pricing documentation carefully and update it at least once a year. Compiling the documentation and updating it on a regular basis allows the company to utilize the up-to-date information related to the transactions immediately. It may be difficult to clarify the background of individual transactions or the details of individual decisions and payments afterwards. If there are no major changes in the company's business operations, updating the documentation annually is fairly easy and straightforward. It may be necessary to only update for example the key figures.

Even if the company is not obliged to compile a full documentation referred to in the Act on Assessment Procedure, it is recommendable for the multinational enterprises to always document their related party transactions, at least in a free-form manner. Carefully documented information is useful if the company compiles a full documentation or discusses matters with the tax authorities afterwards.

What are the characteristics of a good documentation?

A good transfer pricing documentation is such that after having read it a person, who does not know the company before, should understand how the company's business is operated and which factors affect it, which means that how are the functions, the assets used in the functions and the risks assumed divided between the related parties in each related party transaction. In fact, the parties to the related party transactions, their different reimbursements and responsibilities, the circumstances of the transactions and their aims should be described in detail in the transfer pricing documentation.

The company is always in the best position to give a correct picture of its business operations. However, the Finnish Tax Administration provides advice and guidance in the preparation of a good transfer pricing documentation.