Google+
 
RU CN Contacts

Software for Filing of Transactions for the Purposes of Transfer Pricing

Due to the adoption of the law on transfer pricing the tax payers are faced with the issue of documenting of transfer pricing transactions. As s rule, a tax payer has several options – to user the assistance of consultants, to use the internal resources or to buy the software for filing of transfer pricing transactions.

The services of consulting firms the cost of setting up the required documents is pretty high and in some cases it exceeds the possible risks related to the payment of fines and penalties.

The use of internal resources brings three majour problems: lack or experienced human resources for setting up the documents of acceptable quality, the need to purchase costly databases that provide details required for carrying out economic research and investment of a great deal of working time into the tasks outside their specialization.

The use of software allows to combine the two above mentioned approaches, enabling the companies to set up the documents with no experience within quite a short time and for a relatively low price.

Besides, the software can be qualified in two types: the programmes enabling to carry out economic analysis for the purpose of establishing the range of market prices, the (databases) and the programmes enabling the companies to prepare a full set of documents, including the industry and functions analysis and the economic analysis.

The Databases

Databases are the source of information required for economic analysis in order to determine the range of market prices. They can be divided into two types: a database providing information on prices, and a database with the information on companies, including financial characteristics.

The databases with the information on prices are typically used to determine the interest rate on loans and the size of the royalties.

The databases providing information on companies are used to determine the price of goods, works and services.

Most databases are not a specialized product designed specifically for the needs of companies involved in transfer pricing. Thus, the transfer pricing market is ancillary for the developers, and therefore, the information obtained from such databases requires substantial processing which is a time consuming process and it is not possible without the user having enough experience, so databases are used by consulting companies providing the ready product to the consumers – the companies involved in transfer pricing transactions.

The below list includes the database most widely used by companies that provide services in the area of transfer pricing and by some multinational companies.

Foreign databases:

  • Burea van Dijk – provides financial statements of Russian and foreign companies. It is suitable for defining prices for goods and services;
  • Lexus Nexus – is a search engine based on “SEC filing” system;
  • Compustat – provides financial statements of Russian and foreign companies trading in stock exchange. It is suitable for defining prices for goods and services in certain jurisdictions only;
  • Value line – provides financial statements of Russian and foreign companies trading in stock exchange. It is suitable for defining prices for goods and services in certain jurisdictions only;
  • Loan connector –provides information on loans (interest rates, cost of service and the like);
  • KTMine – provides information of the size of the royalties.
National databases:
  • SPARK (СПАРК) – provides financial statements of Russian companies. It is suitable for defining prices for goods and services;
  • SCREEN (СКРИН) – provides financial statements of Russian companies. It is suitable for defining prices for goods and services;
  • Rosstat (Росстат) – is a source of information for the SPARK and SCREEN databases and the like.

Specialized software for creating a set of documents

Most of the specialized programs are based on the recommendations of the Organization for Economic Cooperation and Development. Given the fact that the transfer pricing rules in most countries are based or directly refer to these recommendations, the use of these programs allows to create documents that comply with the transfer pricing rules in most countries. For some countries (e.g. Russia, Spain, Italy), these documents will require some modifications and translation.

In this regard, some of the players on the market offer positioning where the biggest part of the global documentation is transformed under certain rules.

The international practice proves that the use of transfer pricing software is widely spread by multinational companies because such big companies have the required human resources that specialize in these matters. The application of specialized programmes by employees of these companies enables them to dramatically reduce the time for creating documentation for various jurisdictions as well as to essentially reduce the costs provided that the specialized transfer pricing programmes, as a rule, give access to the required databases. Furthermore, the use of specialized transfer pricing programmes enables to establish a systematic approach to the creation of a global set of documentation and makes it easier to set up structure changes when adapting the documents to the rules of certain jurisdictions.

The use of specialized transfer pricing programmes by smaller-scale companies is often impeded by the lack of ready-made product offers from the majour suppliers of specialized software in the proposal package. The users come to the need to make economic searches as the databases do not offer ready-made economic researches but contain initial data only. Under such circumstances, when a company does not have the human resources to deal solely with transfer pricing matters, creation of such documentation is a hard task, at times it is am impossible one.

An extra obstacle for the use of specialized transfer pricing programmes is that some suppliers lack flexible pricing policy. Not only do most of the not develop specialized solutions for SME (Small and Medium Enterprises) but they do not make a difference in the subscription price for the use of the product either, and this causes a relatively high price barrier for the SME.

Due to the peculiarities of creation of transfer pricing documentation, namely, the need to consider the specific tax in combination with the economic approach, the software for the documentation of transfer prices is a niche product. Due to the above, the choice of suppliers of these products is quite limited, but recently new players started to emerge with more flexible and more varied line of products.

It is worth noting that a number of players in this market have started using a more differentiated approach and varying the price depending on customer requirements. The below table shows the features of the software of the major players in the market:


One of the main problems with the use of specialized transfer pricing programs is their implementation.

Given the standard character of most situations in simple transactions, for small and medium-sized enterprises, this problem can be solved by the introduction of the standard settings for different situations, such as the relationship of the manufacturer or distributor and the seller and purchaser of services. This approach allows a user to create a standard set of transactions and facilitate the management of the program. In fact, some suppliers provide a product with a default choice of the method according to the allocation of functions and risks and assets between parties in the transaction that allows inexperienced users to create transfer pricing documentation.

This approach usually does not work on large companies because of the complexity of transactions between companies of large groups. Each situation is unique in its own way, and the difference in the standard transactions in various corporations is usually quite substantial. Moreover, multinational corporations must have documentation that meets the transfer pricing rules in different jurisdictions, often in different languages. Under these circumstances, implementation of a standard transfer pricing program is a time consuming, often unworkable, process.

In this regard, the issue of a customized programme tailored for a particular client, i.e. the settings of specialized modules depending on the company features and its jurisdiction that require the documentation. Despite a fairly high price of making a customized programme, this approach allows to save time and money for the transformation of the global document under the requirements of a particular jurisdiction and pays off in quite a short time.

The use of databases is the prerogative of companies specializing in the provision of services in the area of transfer pricing, as the database itself is quite expensive, and the information contained in them requires significant processing.

Use specialized software to create transfer pricing documentation enables companies to save time and resources. Despite the fact that the choice of suppliers of these programs is rather poor, the programs allow companies to create transfer pricing documentation of sufficient quality for in order to pass tax control.