Sarbanes-Oxley requires a company to establish that it has internal controls to ensure accurate financial reporting and that the auditor attest to the assessment of those controls. An obvious concern for all multinationals after SOX is whether there are effective controls in place to deal with transfer pricing exposure.
An increasingly important element of transfer pricing documentation relates to the influence of legislation, ethical standards, and associated matters that do not specifically target transfer pricing but nonetheless impose a range of incremental requirements on transfer pricing compliance, documentation opinions, and implementation of controls to make sure that intended transfer pricing results are actually achieved. The state of transfer pricing documentation was fairly simple prior to the transfer pricing penalty final Regulations in 1996 ( TD 8656 , February 8, 1996). 1 While the U.S. penalty Regulations created a flurry of activity, including a veritable cottage industry of external consultants offering their own version of documentation compliance, 2 most multinational enterprises (MNEs) had developed their own documentation models, or relied on external consultants, by the late 1990s. The cost of transfer pricing documentation compliance clearly had increased from pre-1996.
By 2004, some 20 other countries had adopted their own transfer pricing penalty and related documentation regimes, each seemingly more draconian than its predecessors. The consistent theme of these regimes was to offer the carrot of contemporaneous documentation of transfer pricing methodologies (TPMs) to avoid the grasp of nondeductible penalties. These regimes spread extensively as tax authorities sought to protect their domestic tax base from erosion by MNEs. The cost of transfer pricing documentation, of course, increased with the additional requirements, whether done internally or externally.
Congress reacted to the financial scandals