What are the most common transfer pricing disputes and how can you avoid them?

1 Transfer pricing methods

One of the main sources of transfer pricing disputes is the choice of the transfer pricing method. This is the technique used to determine the arm's length price, which is the price that independent parties would agree to in a comparable transaction. There are several methods recognized by the OECD Transfer Pricing Guidelines, such as the comparable uncontrolled price method, the resale price method, the cost plus method, and the transactional profit methods. However, each method has its own advantages and disadvantages, and may not be suitable for every situation. Therefore, you need to select the most appropriate method based on the nature of the transaction, the availability of data, and the level of comparability. You also need to document your rationale and assumptions, and justify your choice to the tax authorities.

2 Transfer pricing documentation

Another common cause of transfer pricing disputes is the lack of adequate transfer pricing documentation. This is the set of documents that shows how you have complied with the arm's length principle and the transfer pricing rules of each jurisdiction where you operate. Transfer pricing documentation typically consists of a master file, a local file, and a country-by-country report. The master file provides an overview of the group's business activities, organizational structure, intangible assets, and financial results. The local file contains detailed information on the transactions and the transfer pricing analysis of each entity. The country-by-country report shows the allocation of income, taxes, and assets among the group's entities in different countries. Transfer pricing documentation is essential to demonstrate your good faith and transparency, and to avoid penalties and adjustments from the tax authorities.

3 Transfer pricing adjustments

A transfer pricing adjustment is a correction made by the tax authorities to the reported income or expenses of a related entity, based on their own interpretation of the arm's length price. Transfer pricing adjustments can result in double taxation, where the same income is taxed twice by different jurisdictions, or double non-taxation, where the income escapes taxation altogether. Transfer pricing adjustments can also trigger interest charges, penalties, and additional reporting obligations. To avoid or minimize transfer pricing adjustments, you need to ensure that your transfer pricing policies are consistent, coherent, and compliant with the relevant tax laws and treaties. You also need to monitor your transfer pricing outcomes and make adjustments if necessary, to reflect changes in market conditions, business strategies, or regulations.

4 Transfer pricing audits

A transfer pricing audit is a process where the tax authorities examine your transfer pricing practices and transactions, and verify whether they conform to the arm's length principle and the applicable tax rules. Transfer pricing audits can be initiated by various triggers, such as significant fluctuations in your profit margins, unusual or complex transactions, inconsistent or incomplete documentation, or information requests from other tax authorities. Transfer pricing audits can be time-consuming, costly, and stressful, and they can expose you to the risk of transfer pricing adjustments, disputes, and litigation. To prepare for and handle a transfer pricing audit, you need to have a clear and robust transfer pricing policy, a comprehensive and updated transfer pricing documentation, and a proactive and cooperative approach with the tax authorities.

5 Transfer pricing disputes

A transfer pricing dispute is a disagreement or conflict between a taxpayer and a tax authority, or between two or more tax authorities, over the application of the arm's length principle and the transfer pricing rules to a specific transaction or situation. Transfer pricing disputes can arise from different interpretations of the facts, the law, the methods, or the comparables. Transfer pricing disputes can also stem from different policy objectives, economic interests, or enforcement practices of the tax authorities. Transfer pricing disputes can have negative consequences for your reputation, cash flow, and business relationships. To resolve or prevent transfer pricing disputes, you need to seek expert advice, explore alternative dispute resolution mechanisms, such as advance pricing agreements, mutual agreement procedures, or arbitration, and adopt a collaborative and constructive attitude with the tax authorities.

6 Transfer pricing best practices

Transfer pricing is a complex and dynamic area of financial management that requires careful planning, execution, and monitoring. To reduce the likelihood of disputes, you should align your transfer pricing policy with your business strategy and value creation drivers. Additionally, you should choose the most appropriate transfer pricing method and apply it consistently and accurately. It is also important to prepare and maintain thorough and reliable transfer pricing documentation, review and update it regularly and timely, communicate and cooperate with the tax authorities, and seek professional guidance on complex or uncertain transfer pricing issues. By following these best practices, you can manage your transfer pricing risks and opportunities while achieving tax compliance and optimization.

7 Here’s what else to consider

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