Transfer pricing audits can be a challenging experience for any taxpayer, and it is important to have a clear understanding of the rules and procedures involved in the process. One of the key aspects of transfer pricing audits is risk assessment, which involves the identification of potential areas of risk and the development of strategies to address them. In this article, we will discuss the importance of risk assessment in transfer pricing audits and provide some insights into the procedures involved.
The Transfer Pricing Examination Process (TPEP) issued by the IRS in 2018 provides guidance on the procedures to be followed in transfer pricing audits. One of the key steps in this process is risk assessment, which involves the identification of potential transfer pricing risks and the development of a plan to address them. The TPEP emphasizes the importance of early fact-gathering, collaboration between team members of different disciplines, and relevant discussions with the taxpayer during the audit.
To perform a risk assessment, audit teams should use all available information, including financial and non-financial data, to identify areas of potential risk. In addition, they are encouraged to use information on Country-by-Country (CbC) reporting from Form 8975 to analyze high-level transfer pricing and Base Erosion and Profit Shifting (BEPS)-related risks. The CbC report provides information on the global allocation of income, taxes paid, and certain indicators of economic activity among tax jurisdictions.
Once the areas of potential risk have been identified, audit teams will then conduct a more detailed analysis of the functions, assets, and risks associated with the transfer pricing transactions in question. This analysis will involve a review of relevant financial information, as well as discussions with the taxpayer and any other parties involved in the transactions.
During the execution phase of the audit, audit teams will hold reassessment meetings to discuss new information, adjust the working hypothesis, and determine whether issues should be pursued or closed, or whether new issues need to be added. These meetings are an essential part of the risk assessment process, as they allow the audit team to stay up-to-date on any changes in the facts and circumstances surrounding the transfer pricing transactions.
In conclusion, risk assessment is a critical component of transfer pricing audits, as it enables the audit team to identify potential areas of risk and develop a plan to address them. The TPEP provides detailed guidance on the risk assessment process, emphasizing the importance of early fact-gathering, collaboration between team members of different disciplines, and relevant discussions with the taxpayer. By following these procedures, audit teams can ensure that transfer pricing audits are conducted in a fair and efficient manner, while minimizing the risk of disputes and controversies.