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Transfer Pricing Audits: The Cold, Hard Facts
The latest statistical study on transfer pricing (TP) trends are a good indication of where the UK Tax Authority (HMRC) is turning its attention in the audit process. Taxand UK looks at the results of a recent TP study and how UK companies can adopt a risk-based approach in the face of a TP audit.
Recent TP statistics show a reduction in the average time taken to resolve a TP audit. However, what does this really mean for UK businesses? There are two main reasons for the shorter resolution time in TP audits:
- HMRC has been focusing more and more on TP audits and assembling a specialist team to deal with the inquiries (e.g., experienced economists and risk assessment models). The specialist team resolves audits more expeditiously; however, the number of audits has also increased.
- UK companies have been paying more attention to transfer pricing and complying with documentation requirements by either using outsourced expertise or building a TP team in house.
For those companies where TP risk is reasonably higher than average (ie large intragroup transactions, complex structures / transactions, TESCM planning, etc.), the risk of being audited increases. Therefore, it remains critical to produce robust TP documentation and ensure that implementation is carried out correctly.
Businesses should try to adopt a risk-based approach to TP studies (eg using more than one method to test the policy, seeking an APA or ATCA, etc.). This may require an allocation of resources in the short term, but is still far less costly and time consuming than a two-year TP audit.
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