The term Transfer Pricing (TP) is used to describe pricing arrangements between companies when they transact related entities between themselves. The entities can include any of the following:
∙ Intellectual Property
∙ Tangible Goods
∙ Other Financing Transactions
Such transactions take place both on the domestic as well as the international front. It is growing at a rapid speed, thus adding complex layers to the process. It is requisite of all companies, big or small to maintain compliance with the various requirements of multiple overlapping tax jurisdictions. An immensely complicated and time-consuming task, Transfer Pricing Audit thus requires care and diligence.
Importance of Transfer Pricing Audit
∙ Penalties imposed by Tax authorities are getting stricter and more common in case of non-compliance.
∙ Companies need to be prepared for substantial risks and disputes in the event of intensive Transfer Pricing Audits which are on the rise.
∙ Proper audit exposure involves audit proceedings before, during, and after it takes place. A proper understanding of the relation between these 3 phases is essential to manage Transfer Pricing proactively.
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How To Prepare a Transfer Pricing Audit
A checklist that helps multinationals prepare for Transfer Pricing Audits consists of the following parts:
Pre Audit Period
∙ This involves the daily preparation of the Transfer Pricing General Documents
∙ Determine the need and purpose of documentation
∙ Create and maintain local, regional, international TP documentation.
∙ Maintain legal agreements that corroborate intercompany transaction permission.
∙ This starts from the receipt of the announcement
∙ Ask of relevant audit information from the tax inspector: estimated time scope, which years are to be audited, which taxes are to be examined.
∙ The TP advisor must be informed, in order to determine the audit character: normal or periodic.
∙ Clear out possible disputes; preview and check availability of information that will be asked; consult TP advisor and prepare a Transfer Pricing Report
∙ Conduct a thorough check on potential transfer pricing risk areas such as recent business developments, TP policy, previous discussions with tax authorities, questionnaires from TP auditors, minutes of meeting, etc.
Actual Audit Period
∙ Ask for an ID of the revenue officials
∙ The opening meeting can include an offer to show around the company: an often appreciated gesture
∙ Preparing procedural arrangements such as:
1. A Direct Contact Person for the auditor to interact with
- Lay down procedural arrangements in writing
∙ Functions of Direct Contact Person include:
1. Manage questions from Auditor
2. Centralize answers
3. Maintain written records of correspondence
4. Arrange meetings with specific employees if required.
∙ During the audit period, maintain interaction, schedule periodic meetings to judge progress or issues, and evaluate audit strategy accordingly.
∙ Arrange for the closing meeting
Post Audit Period
∙ The auditor must be asked to give the company officials a final Audit report; check for written adjustments
∙ Try to prevent TP dispute through internal evaluation between the company and TP advisor
∙ If any outstanding issue crops up post-audit, future strategies must be determined.
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