Preparing Transfer Pricing Documentation in Today’s Compliance Environment

In the past, companies may have come to believe that a large, impressively bound transfer pricing study would automatically provide them with penalty protection.  Recently, however, IRS agents have been instructed to look critically at those studies.  Today, agents are reading documentation closely to verify that the analysis presented is reasonable, and that it deals specifically and thoroughly with the taxpayer’s actual facts.  Thus, for example, a report with “canned” summaries of IRS regulations and OECD guidelines, long quotations from the company’s 10-K or 20-F, and standard sets of comparables generated automatically with little careful attention to the taxpayer’s facts may actually backfire if IRS agents suspect that they are being compelled to read voluminous boilerplate that sheds little light on the transfer pricing policies that the company has adopted.

A separate problem with transfer pricing documentation has emerged recently with the implementation of FIN 48.  Today, accounting firms routinely review the adequacy of a company’s transfer pricing documentation as part of their review of the company’s financial statement tax provision.  This review affords valuable protection to the company, as it identifies potential deficiencies in the documentation which might otherwise go uncorrected.  Sometimes, companies are tempted to engage their auditing firms to compile the transfer pricing documentation that the same auditing firm will then review.  This practice, while permissible under the Sarbanes-Oxley law with approval of the audit committee of the company’s board of directors, deprives the company of the protection of an independent review of its documentation.  At a recent conference, the former general counsel of the PCAOB asked why companies would “take risks” by seeking sensitive tax services from their audit firms.

As a law firm with deep experience in transfer pricing that is independent of any auditing firm, we can provide very high-quality documentation that addresses these issues and often can do so at a surprisingly low cost.  We adhere to the following principles in compiling transfer pricing documentation:

Highest Quality.  We do not use rote checklists; the “functional analysis” is conducted directly by respected attorneys who are trained and experienced in developing facts.  In every instance, our most senior lawyers are involved personally in the preparation of all parts of the documentation, and you will always have direct access to those lawyers. 

Custom Work.  While remaining efficient, we custom-draft your documentation.  We do not “cut and paste” long sections of another client’s documentation. 

Independence.  We exercise independent professional judgment in compiling documentation; as substantive issues are presented, we discuss them in depth with you.

Hand-Picked Economists.  We include on our teams experienced, independent economists chosen either from among those you have worked with in the past or from among those we recommend. 

Quality Foreign Network.  We offer, as necessary, a choice of best-in-class foreign attorneys with whom we work in coordinating clients’ documentation worldwide.

Reasonable Cost.  We staff our engagements so that our fees remain very competitive in light of the quality of documentation provided, and are often more reasonable than those charged by other firms.

We would welcome the opportunity to discuss with you the Steptoe difference.  Please contact Mike Durst or Phil West at the numbers below.

Michael Durst                                                           Philip West mdurst@steptoe.com                                            pwest@steptoe.com
(202) 429-8114                                                       (202) 429-6247