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    Managing Transfer Pricing (TP) Audits and Preparing for Documentation

    January 2024

    Managing Transfer Pricing (TP) Audits and Preparing for Documentation

    Transfer pricing remains a major risk to companies around the world. The growing complexity of worldwide transfer pricing rules continues to present a three-dimensional challenge for multinational companies ("MNCs") with respect to documentation requirements, transparency initiatives and audits.

    Here are the top four key considerations for tax and transfer professionals globally:

    Documentation is key

    Documentation is required to substantiate the MNC’s position and combat transfer pricing risk. The strategy followed by most MNCs focuses on consistency, transparency, and centralized reporting, and varies depending on the risks faced and the resources available. As part of a tax director’s daily routine, maintaining robust TP documentation takes priority especially when the transfer pricing litigation risk is high. While maintaining documentation, the MNCs face a lot of challenges often around lack of control and transparency, which typically imposes direct financial risks or inefficiencies, easily amounting to millions of dollars of exposure. Missing or insufficient documentation may also result in adjustments and penalties in many jurisdictions, in addition to the costs of duplicating work in different countries. In the case where documentation is outsourced, the challenge can be even greater, due to limited visibility and control over the documentation process. Given the importance of robust and reliable documentation, it is pertinent to have the following as part of the process to maintain documentation:

    • Internet checks
    • Team structures for reporting
    • Internal chain of communication

    Role of automation/software in maintaining documentation

    With the current volatile economy, firms must maintain robust documentation and ensure active participation from all parties, who are needed to provide the necessary information on the functions, assets, and risks involved in their various transactions. Technology creates efficiencies and structure around the way documentation is collected and maintained by various entities. Since creating or updating documentation manually is error-prone and tedious work, especially if one must prepare documents for tens or hundreds of group entities, implementing automation is critical. Automation not only saves time, but also results in better quality documentation. Building centralized data storage also solves several problems, from decreasing risk from losing key personnel to saving the amount of time and resources needed to search for different documents and reports.

    Identifying and assessing TP risks

    Tax risk is one of key areas of analysis for any taxpayer to safeguard its tax position and tax authority to be able to challenge and pose good questions to the taxpayer during any audit. Transfer pricing risk if not analyzed and taken into consideration would result in huge tax penalties for taxpayers, hence it is one of the most important areas to consider. With the new compliance laws around transfer pricing, there is more transparency and filing requirements imposed on the taxpayers which gives the tax authorities more information for a detailed analysis. This in turn is important for the taxpayer to justify its tax position as well. The key components in assessing transfer pricing risk would revolve around financials, ownership structures, global footprint, intellectual property and other intangibles and the flow of transactions/profits.

    Accordingly, maintaining, and updating documentation in a structured manner goes a long way in managing and reporting transfer pricing documentation. To identify and assess risk a taxpayer would need better planning of international transactions keeping in view the transfer pricing and reporting laws followed by various tax jurisdictions. In addition, it would also involve using tools to analyze industry and market trends.

    “Based on our experience at Henkel, there is a substantial benefit in preparing TP documentation and doing benchmarking in-house, by following a combined centralized and decentralized approach, that is supported by our specialized shared service center resources. Preparing documentation ourselves contributes to enhanced ownership of the “documentation product” established by the local Finance organization, which in turn feeds into an increased level of confidence in “arguing our case” in TP audits in countries. To some extent, this also helps to reduce external advisory costs, thus creating savings based on the internal vs external cost differential.”

    - Dr. Martin Lagarden, MBA – Head of Global Transfer Pricing at Henkel

    Adhering to different reporting requirements around the world

    The biggest difficulties in adhering to reporting requirements around the world is around differing requirements and deadlines for reporting. The companies are required to assess the transfer pricing risk, and give greater focus to compliance efforts in countries where the risk is highest. The cultural and knowledge variations also plays a vital role in this process. In order to minimize the challenges around different reporting requirements, companies should:

    • Put controls on reporting
    • Communicate internally and externally to maintain a seamless flow of information
    • Maintain consistency in the reporting structure
    • Centralize documentation to avoid mishandling and delay in data (the approach can be decentralized for those tax jurisdictions where the tax risk is low)

    Maintaining documentation and successfully completing audits revolve around the tax story that a company ingests, follows, and reports through its robust documentation process. With the increase in compliance requirements, it is imperative for companies to be consistent and transparent while maintaining structure and planning around how documentation is taken care of. Using any form of automation is key considering the size and volume of data that is in question for a lot of MNCs.


    “As the breadth and depth of regulatory requirements is steadily growing worldwide, automation and the employment of IT tools in TP for benchmarking documentation or price setting is a must, to do more with less personnel resources and ensure compliance and penalty protection on a sustainable basis going forward.”

    - Dr. Martin Lagarden, MBA – Head of Global Transfer Pricing at Henkel