A transfer pricing audit denotes the formal review process by tax authorities to evaluate whether related-party transactions involving multinationals operating locally adhere to the arm’s length principle.
Common Audit Techniques:
- Critical analysis of the taxpayer’s transfer pricing documentation for deficiencies
- Examination of financial data and tax returns filed for indicators requiring closer inspection
- Application of benchmarking studies to assess if pricing methods/comparables utilized appear valid
- Interviews with corporate officers to understand business operations supporting strategies
Example:
During a transfer pricing audit, the IRS spent months requesting additional documents from the tech company as comparables were difficult given its unique IP assets and functions.
Takeaways:
While audits aim to protect revenue integrity, their prospect deters strategic planning and carries reputational risk. Taxpayers can minimize contingencies via enhanced compliance programs and building cooperative relationships with tax administrations.