Refining a centralised transfer pricing approach

Traditionally, there are two main approaches which multinational companies apply when dealing with their transfer pricing documentation: the first would be a decentralised approach which consists of each company in a group being in charge of preparing their own documentation.

The main advantage of this approach is that each entity in the group gets a customised report which fits its local specific documentation requirements.

However, this approach is accompanied by the following main disadvantages such as:

• high costs due to the duplicity of work and effort by the repeated preparation of similar facts and content;
• possibility of inconsistency in the transfer pricing analysis between different companies within one group analysing the same transaction;
• difficulty for the central tax function to monitor and enforce their favoured quality standards or other content-related requirements.

Due to these disadvantages many multinational companies, including SIEMENS, prefer to apply the centralised approach which consists of a core documentation being prepared centrally which covers all required countries. This documentation is then amended either by local adaptations to the whole core document or by individual country-specific chapters in order to comply with local specific requirements.

Central documentation approaches are typically characterised by including – mostly in narrative style – not only a relatively extensive description of general facts (eg, industry analysis, description of the business model, etc) but also a generic description of different transaction types and economic analyses.

SIEMENS has implemented a centralised approach (‘Masterfile Concept’) for years. On the occasion of the internal restructuring measures of the business units, the concept was further refined. In this regard, the main goals of the conducted refinement were to streamline the documentation processes as much as possible by designing a modular structure (‘Modular approach’) with update letters in subsequent years where feasible, and to realise significant cost savings within the next two to three years while reducing the risks of penalties as extensively as possible.

Additional objectives of the refinement process were a transitioning of the documentation process to in-house preparation within subsequent documentation cycles, reducing time for input, review and update, easing of maintenance and updating, and a more timely and effective risk management process.

The implementation of a standardised, centrally managed and modular documentation approach, which limited the costs incurred for the preparation of the Transfer Pricing documentation, allowed for an easy transition from the previous documentation in place at SIEMENS.

The global penalty protection issue was dealt with by having local transfer pricing experts in each country amend specific Modules (chapters) of the centrally prepared documentation in order to ensure its compliance with specific local formal requirements. SIEMENS is a globally integrated technology company operating in the industry, energy and healthcare sectors.

Sven Bremer, Global Head of TP, SIEMENS