As the OECD is developing new guidelines to address transfer pricing (TP) risk, including the Country-by-Country (CbC) template, a lack of emphasis resides in the idea that every tax audit involving cross-border issues should require an opening discussion between the taxpayer and the tax authorities of the business, its relevance in that jurisdiction apart from its global business, the functions, assets and risks for that jurisdiction upon which the arm’s length principle is based, and the rationale for the level of income/loss generated during the audit years.
Transfer pricing documentation reports, including a local country report, may be available for review. However, such reports may not simply convey the business rationale easily to form an accurate understanding prior to embarking upon a leap into technicalities and assumptions to initiate data requests and move forward on assumptions prematurely. For example, a company investing in a less developed country seeking long-term growth based on the domestic opportunity may have start-up losses, although such losses may be significantly offset by potential future income.
The open audit discussion should be developed into a Best Practice Ways of Working framework which is discussed and signed by the taxpayer and tax authorities. This framework should be a simple and practical document addressing open dialogue, preliminary discussion of issues designed to produce the relevant documentation, timelines for requesting and providing information and a continuing dialogue discussing the status of open issues and requests, with a mutual effort to resolve issues efficiently.
To the extent this simple idea could be integrated consistently and uniformly around the world, it is a challenge worth addressing.
The Best Practice Ways of Working Framework could be a very effective and practical tool, supplementing the technical and legal requirements for transfer pricing.