Documentation and Burden of Proof: Insights from Transfer Pricing Disputes

This article is part of a series that builds on my previous article: Lessons on the Arm’s Length Principle, Economic Substance, Documentation, and Comparability Challenges – For proper context, read that article first.

The following articles are also related:

In transfer pricing disputes, the quality and comprehensiveness of documentation often determine the outcome. Robust documentation not only serves as the backbone of compliance but also plays a critical role in shifting or sustaining the burden of proof in favour of taxpayers.

The disputes in Refinitiv (Thomson Reuters Group), Glencore Energy UK Ltd, and GE Canada reveal how documentation influences the trajectory of transfer pricing cases, offering important lessons for multinational enterprises (MNEs) navigating today’s complex regulatory landscape.

The Importance of Transfer Pricing Documentation

Transfer pricing documentation serves multiple purposes. Primarily, it provides a rationale for how intercompany transactions are priced, demonstrating adherence to the Arm’s Length Principle (ALP). It also functions as a tool for transparency, offering tax authorities insight into the economic substance of transactions, the methodologies applied, and the comparability data used.

However, beyond its role as a compliance mechanism, documentation is a critical asset in disputes. When disputes arise, the onus often falls on taxpayers to substantiate their transfer pricing positions. Comprehensive and well-structured documentation shifts this burden of proof, compelling tax authorities to demonstrate why the taxpayer’s approach is insufficient or inconsistent with the ALP. Conversely, the absence of robust documentation can leave MNEs vulnerable to adjustments and penalties.

The Role of Documentation in the Refinitiv Case

The Refinitiv dispute underscores how static or incomplete documentation can expose businesses to risk. Refinitiv relied on an Advance Pricing Agreement (APA) that outlined a cost-plus methodology for determining the pricing of services provided by its UK entities. While the APA offered a degree of certainty during its term, it did not account for the evolving nature of the business, particularly the increasing significance of intangible asset development.

When HMRC imposed a profit-split methodology under the Diverted Profits Tax (DPT), the taxpayer’s reliance on the APA became a point of contention. The static nature of the APA documentation and its failure to address subsequent changes in the business environment weakened Refinitiv’s position. This case highlights the importance of ensuring that transfer pricing documentation is dynamic, reflecting not only the current state of the business but also its trajectory.

Documentation Challenges in the Glencore Case

In the Glencore case, the adequacy of documentation came under scrutiny in the context of commodity pricing. HMRC challenged the pricing mechanism used by Glencore, arguing that it did not accurately reflect the market risks borne by the respective entities. The documentation provided by Glencore failed to convincingly demonstrate how the pricing aligned with the ALP, particularly in light of market volatility.

The case underscores the challenges of documenting transactions in industries characterized by fluctuating market conditions. To defend pricing mechanisms, MNEs must maintain detailed records that explain how risks and rewards are allocated and why the chosen pricing method is appropriate under the circumstances. The absence of such documentation can shift the burden of proof, requiring the taxpayer to justify their approach under heightened scrutiny.

GE Canada and the Intersection of Documentation and Expert Evidence

The GE Canada dispute revolved around the pricing of financial guarantees, with the Canadian Revenue Agency (CRA) alleging that the fees charged exceeded arm’s length rates. In this case, documentation alone was insufficient to resolve the dispute, necessitating the use of expert evidence to substantiate the taxpayer’s position.

The court’s analysis placed significant weight on the quality of the evidence provided, including detailed studies on the economic benefits of explicit guarantees versus implicit support. This case highlights the importance of supplementing documentation with credible third-party analyses, particularly for transactions involving complex financial instruments or specialized industries.

The Evolving Burden of Proof in Transfer Pricing

A key theme across these cases is the interplay between documentation and the burden of proof. Tax authorities are increasingly demanding granular details to validate intercompany arrangements, and inadequate documentation often shifts the burden of proof onto the taxpayer. In such scenarios, businesses must not only defend their transfer pricing policies but also address the tax authority’s alternative interpretations.

For example:

In Refinitiv, HMRC’s shift to a profit-split methodology placed the taxpayer in the position of having to justify why the cost-plus approach remained appropriate.
In Glencore, the absence of detailed benchmarking analyses left the taxpayer vulnerable to HMRC’s adjustments.
In GE Canada, the taxpayer’s reliance on expert evidence underscored the heightened burden of proof in disputes involving complex transactions.

These cases illustrate that the burden of proof is not static—it evolves throughout the dispute process, often influenced by the quality of the taxpayer’s documentation.

Best Practices for Transfer Pricing Documentation

The lessons from these cases provide a roadmap for strengthening transfer pricing documentation:

Detail and Transparency: Documentation should comprehensively address all aspects of the transaction, including economic substance, comparability data, and the rationale for the chosen methodology.
Dynamic Updates: Transfer pricing policies and documentation must evolve with the business. Regular reviews and updates are critical to ensuring that documentation remains relevant and defensible.
Supplementary Evidence: In cases involving complex or unique transactions, documentation should be supplemented with expert reports or third-party analyses to bolster credibility.
Alignment with Economic Substance: Documentation must accurately reflect the actual conduct and risks of the entities involved, aligning with both legal agreements and economic realities.
Preparation for Scrutiny: Businesses should anticipate potential challenges and proactively address areas of ambiguity or risk in their documentation.

Documentation is the foundation of transfer pricing compliance and a critical tool in managing disputes. The Refinitiv, Glencore, and GE Canada cases highlight the consequences of inadequate or static documentation and the importance of proactively addressing the burden of proof. By adopting best practices and maintaining dynamic, comprehensive records, MNEs can confidently navigate the complexities of transfer pricing, ensuring that their positions are compliant and defensible in the face of scrutiny.