HOW TO PREPARE FOR A TRANSFER PRICING AUDIT The chances of a multinational being confronted with a transfer pricing audit have substantially increased over the last few years. Due to the intense focus on transfer pricing by almost all tax authorities around the globe, together with growing focus on international exchange of information, it seems only a matter of time before any multinational will be subject to transfer pricing audit scrutiny. Such audits may provide for substantial risks and disputes, and proper preparation by the multinational is a key in managing these risks. In order to best manage audit exposure, it is essential to understand that this involves not only the actual audit proceedings but also the time before and after the actual audit takes place. The following picture illustrates the inter-dependencies between the preaudit, audit and post-audit phases: Transfer pricing audit checklist Transfer Pricing Associates has created a transfer pricing checklist to assist multinationals in preparing for a transfer pricing audit. This checklist addresses relevant issues to consider in all three phases (pre-audit, audit and post audit) and provides for relevant guidance in managing the actual audit process. It also includes an example disclosure manual and an indicative list of relevant information. Although it is understood that local requirements and circumstances may call for specific attention, the checklist addresses general issues that will be important in all situations.
Some best practices from Transfer Pricing Associates experience are as follows: Prepare well in advance; Involve your TP advisor as early as possible; Establish structured communication with tax auditor; Use a disclosure manual; and Consider a structured transfer pricing control framework For a copy of the Transfer Pricing Associates audit checklist please click www.tpa-global.com/auditchecklist For more information on the complex issue of transfer pricing controversy, please contact: Richard Slimmen r.slimmen@tpa-global.com +31 20 262 2983 Global lead of TPA controversy practice About Transfer Pricing Associates: Transfer Pricing Associates is the leading independent provider of global transfer pricing and valuation services and part of the TPA Global group. The TPA Global group is an independent and specialist provider of expert transfer pricing, tax valuation and customs services, headquartered in Amsterdam and with our own offices and coverage in over 30 countries around the world. Transfer Pricing Associates provides high quality transfer pricing advice and assistance to multinationals of all sizes, wherever they are located. For more details of our innovative services, please visit our website at www.tpa-global.com
Pre-Audit Period Daily Preparation of TP General Documents 1 Determining the need and the purpose of the TP documentation. 2 Creation/preparation/maintenance of global/regional/local TP documentations and legal agreements to support inter-company transactions. 3 Check whether the TP documents which are likely to be reviewed are complete or not. If not, complete the documents. 4 Check your TP Maintenance and Disclosure Manual (see example Appendix 1.) Audit Announcement 1 Upon the receipt of the announcement, make sure there is sufficient and reasonable time to get prepared for your TP audit. Do not simply accept any starting date if it is too rush for your preparation. 2 Ask the tax inspector or the tax auditor in advance for the relevant information of the audit, i.e. the estimated time scope of the complete audit; which financial years and which taxes will be examined. 3 Inform your TP adviser of the coming audit as early as possible. 4 Try to determine the character of the audit: is it a normal, periodic audit or are there specific reasons for the audit to be performed. 5 In case of any possible dispute on transactions related to goods, check with your TP advisor as soon as possible on whether there is a need to consider possible customs impact on your TP policy. 6 Try to preview what information will possibly be asked and check whether this information is readily available (see Appendix 2). 7 Prepare yourself in consultation with your TP adviser for those topics which are likely to be examined. 8 Conduct a high level check on potential transfer pricing risk areas, such as: Check recent /relevant business changes which might have had impact on your TP policy and accordingly the relevant documentations; and Specific recent business development on TP policy; Check previous discussion/issues with tax authorities relating to TP, e.g. questionnaires from TP auditor; minutes of the meeting with TP auditors. 1
Actual Audit Period 1 When the Revenue officials present themselves at your premises for the audit, ask for their ID. 2 Prepare for an opening meeting during which some background information is given on the company. An offer to be shown around the company is often appreciated. 3 The opening meeting should be used to make procedural arrangements such as: To present a Direct Contact Person to whom the auditor can turn for questions. Assign an employee as a direct contact person who can then supply the information requested by the auditor and see to his other needs; To show the TP auditor which facilities can be used. Make sure that the TP auditor has a comfortably situated room (not dark or noisy) for use for the entire tax audit period. This room should be cleared of any kind of information, whether stored, lying about or available through a terminal in the room; To lay down procedural arrangements in writing and be sure to be explicit on the point that the TP auditor is forbidden to wander aimlessly around the company or to loiter about; and To alert the other personnel of the TP audit and inform them that communication with the TP auditor is to be channelled through the assigned Direct Contact Person. 4 The functions of the Direct Contact Person are: To manage questions/questionnaires from the TP auditor; To manage/centralize answers to be provided to the TP auditor; To keep track on questions/questionnaire from the TP auditor and answers/information/documents provided (written records are preferable); Make sure that any questions/questionnaires from the TP auditor will be put in writing; To arrange meeting(s) and conduct the communication meeting if the TP auditor has questions to ask any specific employees in the company; and To offer/make copies of documents which the TP auditor requests or considers to be important for his audit. 5 Throughout the audit period, try to stay regular updated between auditor and company, such as: To stay in regular contact and interaction with the TP auditor; To have Daily/regular conversations with the TP auditor; To schedule periodic evaluation meetings to discuss progress and/or potential issues. 2
To arrange a closing meeting on the finding from the TP auditor, e.g. the possibility of the adjustments. 6 In the course of the TP audit, determine/evaluate your audit strategy with your TP advisor. Post-Audit 1 Ask for a written final audit report from auditor. 2 Check whether written adjustment has been made. 3 Internal evaluation between company and TP advisor for the result of the TP audit for the purpose to prevent potential TP dispute, and/or to build future APA. 4 Determine strategies on how to address further outstanding issue after TP audit. 3
Appendix 1 template of disclosure manual Document Ownership Location (where records are kept) Who Is Responsible for Updates Intended Use Who Decides Disclosure Frequency of Updates Transfer Pricing Document FY 20XX (Masterfile) HQ (tax) HQ HQ Basis for preparing countryspecific documentation; full disclosure only to country of parent company. HQ Annually (1) Intercompany agreements HQ (legal) All companies part of the agreement(s) HQ Disclosure to all tax authorities upon request Local Annually (2) TP Policy Statement HQ (tax) All companies HQ Disclosure upon request HQ Annually (3) IPR Policy Statement HQ (legal) All companies HQ Disclosure upon request HQ Annually (4) Country-risk assessment HQ (tax) HQ HQ with local inputs Not for disclosure HQ Every 12 months (5) Local Documentation Country 1 Local Local + HQ Local Disclosure to local tax authorities Local, with notice to HQ Annually (give month) (6) Local Documentation Country 2 Local Local + HQ Local Disclosure to local tax authorities Local, with notice to HQ Annually (give month) (6) 4
Appendix 2 Documents which the Tax Inspector or the Tax Auditor May Request for the TP Audit (Non-exhaustive summary) 1. Specific TP report: Latest TP Masterfile; Regional TP report(s); and Local TP report(s). 2. TP policy papers: TP Policy Statement; IPR Policy Statement; and Country Risk Assessment. 3. Legal agreements: Agreements related to inter-company transactions; and Employment agreements. 4. Minutes of the (annual) general shareholder's meeting and minutes of the meetings of the Board of Directors. 5. Substance related documents: IPR approvals; IPR registration; and IT authorization documents. 6. Profile descriptions of key personnel functions. 7. General audit information Tax returns for corporate income tax, wage tax and VAT; Financial Statements (e.g. financial accounts; balance sheet; ledgers etc.) Receipts sent by the court registrar to a lawyer (advocate); Notes payable/receivable; Depreciation schedules/amortisation schedules; Shareholders Register; Bills, receipts and box office draws; Business correspondence; Pocket diaries; Bank account statements; and Client files, management files and correspondence with the shareholder(s)/parent company. 5