Multi-component companies can benefit from a significant business advantage by sharing the costs of developing or acquiring certain assets, including intangible assets. The detailed U.S. rules provide that group members may enter into a cost-sharing agreement (CSA) with respect to the costs and benefits of developing intangible assets.  The OECD Guidelines contain more general proposals to tax authorities regarding the application of cost contribution agreements (KPAs) with respect to the acquisition of different types of assets.  As a general rule, these two rules provide that costs should be shared among members on the basis of the expected benefits. The fees between members should then be collected in such a way that each member bears only its share of those costs. Since allocations must naturally be made on the basis of expectations of future events, the allocation mechanism must provide for forward-looking adjustments where previous projections of events have proved to be incorrect. However, these two rules generally prohibit the application of retrospectives when allocating allowances.  U.S. regulations also explicitly allow common service agreements.
 Under these agreements, several class members may provide services that benefit more than one member. Invoiced prices are considered to be subcontracting prices when the costs are evenly distributed among members on the basis of reasonably expected benefits. For example, the cost of common services may be allocated among members on the basis of a formula that includes expected or actual turnover or a combination of factors. According to the 2009 circular, taxpayers must disclose transactions with relatives and individuals when filing tax returns.  In addition, the circular provides for a set of three-step documentation and reporting standards, based on the total amount of intra-company transactions. Taxpayers affected by the regulation who carried out intercompany transactions for RMB 20 million for the year were generally exempt from reporting, documentation and penalties. Transactions of more than RMB 200 million normally had to carry out transfer pricing studies before filing tax returns.  For higher-level taxable persons, the documentation must include a comparability analysis and a justification of the transfer pricing method chosen.  This penalty can only be avoided if the liability provider keeps simultaneous documentation that complies with regulatory requirements and makes it available to the IRS within thirty days of the IRS`s request.  If no documentation is provided, the IRS may make adjustments based on the information available to it. At the same time, this means that the documentation existed with 30 days after the filing of the taxable person`s tax return.
Documentation requirements are very specific and usually require analysis of the best method and detailed support for the pricing and methodology used to test such pricing. To qualify, the documentation must adequately support the prices used in the calculation of the tax. Some jurisdictions impose significant fines related to transfer pricing adjustments by tax authorities. These sanctions may have thresholds for the imposition of basic sanctions, and the penalty may be increased to other thresholds….