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TP tampering by the tax authority raises the threat of flight or fight.

International businesses worry that intensive tax audits may be scrutinizing transfer pricing methods too closely.

Multinational corporations claim that the practice of some tax authorities of substituting their own methods for taxpayers' transfer pricing techniques results in uncertainty for businesses.

The severe problem that taxpayers confront when governments choose their own procedures is emphasized by Peter Langer, worldwide TP lead at the energy and water business Itron in Belgium.

"Tax authorities do come up with alternative methods in case they do not think they can successfully challenge the one chosen by the taxpayer," he stated.

Jorge Guerrero, a lawyer at the Barcelona law firm Cuatrecasas, claims that his company has had to carefully manage the legal and tax dilemmas brought on by tax administrations that disregarded the TP methods selected by businesses.

According to him, the mismatch in TP operations frequently occurs when tax authorities object to the results of a taxpayer's TP approach.

He argues that tax authorities occasionally have their own expectations about the amount of revenue businesses should be bringing in inside their respective jurisdictions at any particular time.

He further comments on the steps taken by tax authorities during audits: "When their expectations are not met, they then look for ways to increase the revenues of those companies."

German tax authorities have reportedly been known to employ TP methods other than the ones chosen by taxpayers, according to Ralf Paustian, TP partner at EY in Hamburg.

"If German tax authorities do not like the method of the taxpayer for one reason or another, they may choose an alternative one," he explains.

He contends that firms should be more aggressive in disputes regarding TP techniques and that this should not be permitted to be a simple procedure for revenue services.

"It should not be accepted by the taxpayer without a fight," he continues.

Guerrero claims to have come across instances in which tax administrations shunned discussions of profit mark-up or benchmarking operations. Instead, they just adopted the more lucrative strategy of altering the taxpayer's TP methodology to one that suited their probe.

"We have also seen this with service companies in which we were using the cost-plus method and sometimes tax authorities have changed from this method to a different approach," he says.

Guerrero cites at least two examples where tax officials completely discarded the taxpayer's TP method in favor of their own approach, however each situation may be different.

He claims that they used the cost-plus method and even sought advice from the Spanish tax authority regarding the appropriateness of the cost markup.

He continues, "The approach of the tax authority was that this company did not have to determine its profits by reference to the costs, but rather by reference to the sales."

The irony in this situation is that the international corporation merely offered support services for commercial activity, neither buying nor selling anything in Spain. Instead, he continues, sales were made by a company with a foreign base.

The tax administration merely decided to use the foreign entity's sales to determine the Spanish company's profits as a share of the sales made to the Spanish market.

According to him, the tax authority just started again after using the taxpayer's TP documents, which was consistent with its previous European activity, because they "did not believe that the TP method was valid."

Businesses can learn from these mistakes and take some precautions to reduce the possibility of disagreements during TP audits.

The secret, according to Langer of Itron, is to be proactive when it comes to the filing and recording of TP technique.

This entails documenting the company's filing position up front rather than waiting until it is contested by authorities, taking into account the stance they might take in a future judicial challenge, and anticipatorily outlining the reasons why alternative TP methods might not be appropriate for the business.