Increased focus on Transfer Pricing in tax audits
Today, tax audits tend to be digital and data-driven. Tax authorities worldwide are taking additional measures to assess the alignment between companies' operating models and their tax model. Examples are:
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OECD BEPS actions
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Increased compliance requirements (e.g. country-by-country reporting, Master file and Local file)
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Increased focus on Transfer Pricing in tax audits.
Approach to Transfer Pricing Controversy
We have developed a three-pronged approach to transfer pricing controversy. We can offer you the best solution for every possible situation. Our three-pronged approach to transfer pricing controversy consists of:
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Obtaining certainty in advance through an APA/BAPA (proactive strategy).
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Mounting a strong transfer pricing audit defense.
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Initiating a Mutual Arbitration Procedure if necessary.
Finally, we cannot stress enough the importance of high quality transfer pricing documentation as a solid foundation when dealing with the tax authorities.
Obtaining certainty in advance through an APA/BAPA (proactive strategy)
A proactive approach puts you in control of your Transfer Pricing position, preventing disputes further down the road. An Advanced Pricing Agreement (“APA”) or Bilateral Advanced Pricing Agreement (“BAPA”) is a perfect instrument for removing uncertainty about your Transfer Pricing.
Experience with APA/BAPA
We have extensive experience with the Dutch APA process and can draw on KPMG’s Global Transfer Pricing Services network if an APA in another country is required. If you wish to obtain certainty in advance through a BAPA, our experience and extensive network guarantees a smooth process.
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FAQ
When is a company at risk of a transfer pricing dispute with the tax authorities?
The risk of a transfer pricing dispute increases when intercompany pricing does not adequately reflect the actual activities, functions, risks and value creation within a multinational group. Tax authorities are increasingly using data analytics and international information exchange to assess transfer pricing positions. Business restructurings, new operating models, cross-border transactions and insufficient or outdated transfer pricing documentation can all trigger scrutiny during a tax audit. A timely review of transfer pricing policies and robust documentation can help reduce the risk of disputes and double taxation.
How can double taxation resulting from a transfer pricing adjustment be avoided?
When a tax authority makes a transfer pricing adjustment, the same profits may be taxed in more than one jurisdiction. To eliminate double taxation, businesses may be able to use a Mutual Agreement Procedure (MAP), through which the relevant tax authorities work together to resolve the issue. Greater certainty can also be achieved in advance through an Advance Pricing Agreement (APA) or a Bilateral Advance Pricing Agreement (BAPA). These mechanisms help align transfer pricing positions across jurisdictions and reduce the likelihood of international tax disputes.
What is the difference between an APA, a BAPA and a MAP?
An Advance Pricing Agreement (APA) is an agreement between a company and a single tax authority on the application of transfer pricing principles to future intercompany transactions. A Bilateral Advance Pricing Agreement (BAPA) involves the tax authorities of two countries, providing greater certainty that both jurisdictions will apply the same transfer pricing approach and helping to avoid double taxation.
A Mutual Agreement Procedure (MAP) is typically used after a dispute or adjustment has arisen. Under this procedure, the relevant tax authorities seek to resolve cases of double taxation or treaty-related disputes through consultation and negotiation.
The most appropriate option depends on the specific facts and circumstances, the jurisdictions involved and the stage of the transfer pricing issue. Assessing the available routes at an early stage can help businesses manage tax risks and avoid lengthy discussions with tax authorities.
