Transfer Pricing Audits

Typically, a Transfer Pricing audit is performed to confirm that transactions between related parties are priced correctly and are compliant with local tax laws and the OECD Transfer Pricing Guidelines. MNEs carry out cross-border transactions that are complicated by the division of functions, risks, and high-value intangibles, hence the risk of conflicts over profit allocation.

By means of these audits, the tax officers' target is to make profit shifting unfeasible, create visibility, and secure tax revenues. The penalization for non-compliance with the regulations comprises significant adjustment sums, incidental charges, double taxation, and loss of reputation.

The basis of a successful audit rebuttal is accurate, complete, and contemporaneous data. A detailed functional analysis (describing the functions carried out, assets used, and risks borne—FAR analysis) is absolutely necessary. This study helps pinpoint value drivers and select the most appropriate Transfer Pricing method.

When tax authorities are from multiple jurisdictions, companies must ensure uniform documentation, economic rationale, and audit inquiry responses. Additionally, thorough functional analysis uncovers potential operational and tax-efficient structuring opportunities.

The choice of Transfer Pricing method is central to arm’s length compliance. Tax authorities review whether the adopted approach—traditional transaction methods (CUP, RPM, Cost Plus) or profit-based methods (TNMM, PSM)—fits the transaction’s character. They also examine consistency and the quality of economic and benchmarking analysis.

Incorrect or inconsistent method application can result in adjustments. Focusing on methodological integrity reduces audit risk and increases predictability for global operations.

Critical to defending transfer prices is complete documentation. Multinational Enterprises must maintain up-to-date records such as intercompany agreements, invoices, service reports, benchmarking studies, financial statements, and tax residency certificates. Documents must meet jurisdictional requirements (e.g., translations, notarization).

Good documentation not only proves compliance but also facilitates the audit process and timely finalization.

Successfully withstanding a Transfer Pricing audit requires well-prepared data, the right method, and careful documentation. By aligning intercompany transactions with OECD norms and local tax regulations, MNEs can limit disputes, avoid penalties, and maintain smooth global operations.