Speakers at the Managing Tax Disputes Summit said that even with good documentation, taxpayers can still face long TP audits.
Experts at ITR's Managing Tax Disputes Forum in Amsterdam yesterday, September 27, said that even if taxpayers have good transfer pricing documentation, the aggressiveness of the government could still lead to lengthy audits.
In Spain, for example, taxpayers can expect an average TP audit to take 27 months.
"It’s common, especially in TP, that they [tax authorities] open for three years and close for adjustment," Carolina del Campo, a partner in TP and tax governance at the Madrid-based law firm Cuatrecasas, said during the panel.
"If you don’t do it, they would normally open a new tax audit," she said.
Spanish law says that taxpayers must make TP documentation, which includes the master file and the local file. Larger groups must also follow reporting requirements for each country.
Audits often lead to TP adjustments, which makes it even more important to get ready for the change before the tax authorities look into anything.
Most importantly, TP audits in Spain are not just for big companies, but also for smaller companies that do business in Spain.
"They [tax authorities] are making an exchange of information for TP matters, such as asking about the TP policy and are incorporating that information in the audit," del Campo said.
"From the beginning, you need to find a strategy. Try to look at tools available," she said.
Brad Rolph, a partner and national leader of TP at the Canadian consulting firm Grant Thornton, said that the Canada Revenue Agency (CRA) takes TP documentation from corporations very seriously.
Rolph said, "Canada goes after everyone."
Rolph says that the CRA's request for TP adjustments varies from case to case and transaction to transaction.
Most likely, TP audits in Canada will ask for a company's TP paperwork based on a query sheet.
"They have a standard form and would ask you a standard form of question. Some auditors like to find the information required – they will try to do a field audit as much as they possibly can," Rolph said.
But, according to Rolph, Canada's TP laws also do not have clear rules. Even though the CRA follows OECD rules, the rules are not written into the law.
Since Canadian courts do not officially recognize OECD reports, companies only have to keep records of transactions that are not "arm's length."
"It’s the law that matters and not the OECD guidelines," Rolph stated.
Rolph says that how aggressive tax authorities are also depends on how much money they have.
Unlike the CRA, the Internal Revenue Service does not have the resources to go after smaller firms when it comes to TP audits. This means that US tax authorities are less likely to go after companies in this range.
Strong TP laws are in place in the US. Taxpayers are required to keep a variety of information, called the principal and background documents. This can be anything from a description of how the company is set up to an explanation of the comparables that were used.
By fLEXI tEAM