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Which Transfer Pricing Transactions Make Tax Administrations Suspicious?

May 3, 2022

Transfer Pricing Scrutiny and Audits are Increasing Worldwide

There’s no question: Transfer pricing scrutiny, transfer pricing audits, and transfer pricing adjustments are increasing around the world—and tax executives are feeling the heat.

With multinational companies providing more data than ever before and tax authorities sharing more information, audits have become not only more prevalent, but also more targeted. Which types of transactions are tax authorities targeting?

Which Types of Transactions are Tax Authorities Targeting?

Inadequate documentation is seen as an easy win for tax authorities, many of which, like Belgium and Norway, have created special departments solely dedicated to transfer pricing. Recurring losses are certainly a red flag for tax authorities.

The Norwegian tax authorities are questioning companies headquartered in Norway that it believes should be earning more than routine returns. In developing countries, audits are taking place regarding the deductibility of cost-plus intragroup service fees and benchmarking returns for marketing, distribution, and manufacturing functions. Transactions involving intangibles are also under the microscope and tax authorities will be looking to see that they were analyzed through the OECD’s DEMPE lens.  

Speaking of the OECD, the organization released new guidelines on intercompany financial arrangements in 2020, and so now tax authorities are reviewing intercompany loans very closely. What can you do?

What Can You Do?

Make sure intercompany loan agreements—and all intercompany agreements, really—reflect the reality of your arrangements, including defending your choice of transfer pricing method.

Also, it’s important to understand the jurisdiction you’re operating in. For example, Denmark is home to very few large companies, so small- and medium-sized businesses should expect scrutiny there.

The U.S. recently won a case against Coca-Cola, involving transactions with intangibles assets—so it’s safe to say, it will be looking at similar transactions closely. The bottom line? As transfer pricing reviews increase, so does the importance of robust transfer pricing documentation.

Conduct thorough analyses, provide generous descriptions, and expect that your documentation will be reviewed—because more likely than not, it will be.