Transfer pricing controversy
Prevention
The intensity of transfer pricing disputes continues to escalate on the back of rapidly evolving transfer pricing reform, public scrutiny of multinational enterprises (MNEs), and access to greater resources by revenue authorities globally to enforce what has become an increasingly political issue.
With the actual environment that involves an increasingly exchange of information and transfer pricing inspections all over the world, having a proper transfer pricing policy aligned with the arm´s length principle has become imperative. In the past the MNE focused on minimizing the transfer pricing efforts by prioritizing the transfer pricing reports compliance and the avoidance of penalties for not submitting the reports on time. It is pretty clear that, for the MNE, moving from the transfer pricing´s compliance dimension to the strategic and management dimensions is a necessity.
Tax auditors perform analyses of selected taxpayers, based on the certain input data (“red flags”), which can indicate potential TP risk. Based on the analyses performed, the tax auditors should open tax audit and request documentary evidence such as transfer pricing documentation, intercompany agreements, invoices, meeting notes from board of directors and so on. Some “red flags”/alerts that could trigger questions from tax administration or tax inspection are:
- Change of business model
- Loss-making position for one or several years
- Specific transfer pricing audit challenges per industry, for example:
TP audit challenges in the Slovak automotive industry
Management
Effective transfer pricing audit management is now more relevant than ever in view of increasingly co-ordinated multilateral approaches to transfer pricing compliance and audit management globally.
When an international company faces a tax audit in its home country or abroad, transfer pricing is often one of the key areas of interest from the tax authority. Some local tax authorities are known for the tenacity with which they pursue questions about transfer pricing and documentation requirements. This makes efficient audit management all the most important.
It is important to develop and decide on a strategy for communicating and dealing with the tax authority and internal business stakeholders early on in the process. Some useful considerations to managing a revenue authority enquiry, which will be highly dependent on the nature of the dispute and operating jurisdiction, include:
Engage in dialogue with Tax Authority.
- Understand the basis for their position/their key concerns,
- Identify key areas of disagreement,
- Resolve any misunderstanding of the facts;
Understand the relevance of the line of questioning and keep the enquiry on track;
- Understand your rights and responsibilities e.g. when responding to information requests;
- Ensure responses are robust and technically and factually correct and supported with evidence;
- Consider the use of an internal steering committee and establishing governance around communicating audit developments internally
Resolution
A majority of transfer pricing disputes are ultimately settled as part of commercial negotiations on a principled basis. Where settlement discussions are not fruitful, alternative dispute resolution approaches can be helpful in achieving an outcome satisfactory to both parties, including mediation or arbitration.
The use of independent experts or arbitrators can be helpful in this regard e.g. industry or economic experts. In some jurisdictions advance pricing arrangements (APAs) and mutual agreement procedures (MAP) can provide an alternative means of pre-emptively preventing or resolving a dispute.
In order to achieve legal certainty, companies can in many countries apply for a unilateral or bilateral APA with the local tax authorities. Critical to the successful conclusion of an APA is the technical expertise, knowledge of the requirements specific to the tax authorities of the countries involved and professional project management.
A domestic or foreign tax audit that results in adjustments to transfer prices and thus taxable income may lead to double taxation. In such cases, the taxpayer usually initiates a mutual agreement or arbitration procedure in order to avoid double taxation.
MAP can provide a balanced perspective with input from a counterparty jurisdiction that can give rise to satisfactory outcomes on a multilateral basis.
How can PwC work with you?
Tax auditors are increasingly turning their attention to transfer pricing issues. PwC’s transfer pricing experts assist companies with tax audits and tax court proceedings. Our transfer pricing experts also have the experience to advice companies on the conclusion of APAs and on MAPs.
The transfer pricing experts at PwC Slovakia can draw on experts from PwC’s international Tax Controversy and Dispute Resolution group. These experts are specialized in dispute resolution, the negotiation of APAs and MAPs.
PwC Slovakia’s transfer pricing specialists work closely with the international PwC network. They have many years of experience in defending a wide variety of complex transfer pricing systems in tax audits. They are experienced in dealing with the local tax authorities.
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