7 Steps For Ensuring Transfer Pricing Audit-Readiness
Posted by Valentiam Group on July 6, 2021
As transfer pricing regulations and reporting become an increasingly important facet of international tax, apprehension about transfer pricing audits is unavoidable. For multinational corporations, transfer pricing is one of the riskiest areas in terms of compliance and tax planning. Outside of the U.S., more than 75 nations’ tax authorities now monitor transfer pricing. The IRS is also giving closer scrutiny to transfer pricing, which is a concern not only for large Fortune 500 companies but many medium and small U.S.-based businesses as well.
Every business with intercompany transactions wants to avoid audits, but the truth is that there’s no magic bullet to guarantee your business will never be audited. The tax department can’t control the entire company; some company decisions made for purely operational reasons might make an audit more likely. Because there’s no guarantee, the best you can do is to be prepared in case of a transfer pricing audit. Limit your risk by following regulations and filing accurate reports on time.
In this article, we’ll examine seven steps you should take to reduce the chance of a transfer pricing audit. By following these steps, you will be prepared with reports and supporting records that stand up to close scrutiny by auditors in the event your company is audited.
For help organizing your BEPS reporting, download our free template, A Work Plan For Meeting OECD BEPS Requirements.
7 Steps For Ensuring Transfer Pricing Audit-Readiness
While these seven steps can’t guarantee you’ll avoid an audit, following them will ensure you are well-prepared if your company is audited.
- Perform a self-assessment. Assess your transfer pricing structure and risk in advance to ensure that your overall structure is reasonable. Make sure any newly set-up entities are properly compensated, all economic analyses are up-to-date, and the outcomes of your various legal entities are consistent with your expectations (do this routinely and make adjustments to pricing as needed). If using benchmarks, perform a sensitivity analysis (if you removed one company on the upper or lower end, do your results substantially change?). Consider drafting and implementing a transfer policy guide to help ensure local controllers and global entities are on the same page. Last but not least, think about having a transfer pricing advisor review and assess your risk.
- Comply with local regulations. Keep all documentation that is required or will protect you from penalties in the event of an audit close at hand. For any disclosure forms, documentation, etc. that get submitted, be sure to file on time.
- Put your best foot forward. Your documentation will be one of the first requested items in a transfer pricing audit, so make sure it is a document you are proud of and happy to share. A clear, straightforward presentation of facts and information can go a long way in avoiding basic questions. Ensure the transfer pricing method you’ve used is still the best method and clearly explain why you didn’t choose other methods. Make sure you’ve updated economic analyses and recently reviewed or updated the facts in the functional analysis. Also, remember to create a user-friendly document—use tables and charts or graphics where they will assist the reader.
- Make sure intercompany agreements are prepared, unexpired, and accurately reflect the nature of the transactions and the risks borne by the parties.Your internal documents for related party transactions should be up to date and align with your reports. In the case of an audit, these will help support your case.
- Be consistent. Provide consistent information and a cohesive story across the country by country report, master file, local documentation reports, and intercompany agreements.
- Offer supporting information for backup. Be prepared to offer supporting documents and financial files to back up statements and financials presented in your transfer reports. Know in advance whether your accounting systems can present information in the manner needed to illustrate financial outcomes for intercompany transactions or whether you can present this information manually. If it’s not possible to provide certain data or test a certain transaction in the manner an auditor might expect, be prepared to explain why.
- Pay special attention to intangible property (IP) transfers. Movement of IP between related parties is an audit focus. Ensure you’ve clearly documented any transfers of IP with a valuation performed by a professional and a corresponding planning report outlining the methodology and assumptions.
We’ll help you minimize transfer pricing audit risk.
Transfer pricing can be complex and confusing, but it doesn’t have to be that way.
Valentiam’s world-class transfer pricing specialists deliver innovative, thoughtful, and 100%-supportable strategies you can actually implement. It’s our goal to design economically sound strategies that your company can also easily administer. With the help of one of our seasoned experts, you can maximize company profits and minimize audit risk. Let’s talk about your unique transfer pricing challenges and how Valentiam can help solve them—schedule a free discovery call today.
Topics: Transfer pricing
On June 5, 2021, the G-7 reached an agreement on OECD BEPS 2.0 Pillar One and Pillar Two initiatives, with promise to repeal Digital Services Taxes (DST).