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Managing Tax Disputes Summit: Mismatches in global TP audits laid bare

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L to R: Derya Bresser; Carolina del Campo; Brad Rolph

Speakers at ITR’s Managing Tax Disputes Summit said taxpayers can still face lengthy TP audits, despite strong documentation preparation

Taxpayers may have strong transfer pricing documentation in place but authorities’ aggressiveness could still lead to lengthy audits, according to experts at ITR’s Managing Tax Disputes Forum yesterday, September 27, in Amsterdam.

In Spain, for example, taxpayers can expect a TP audit to last for 27 months on average.

“It’s common, especially in TP, that they [tax authorities] open for three years and close for adjustment,” explained Carolina del Campo, partner in TP and tax governance at law firm Cuatrecasas based in Madrid, during the panel.

“If you don’t do it, they would normally open a new tax audit,” she added.

Spanish law demands taxpayers to prepare TP documentation including the master and local file, while larger groups must also follow country-by-country reporting requirements.

TP adjustments arising from audits are common, meaning preparing ahead of that adjustment before tax authorities make any investigation is even more crucial.

Most importantly, TP audits in Spain are not only targeted at multinationals but also at smaller firms with domestic transactions.

“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,” said del Campo.

“From the beginning, you need to find a strategy. Try to look at tools available,” she added.

Going after ‘everyone’

Brad Rolph, partner and national leader of TP at consulting firm Grant Thornton in Canada, stressed the Canada Revenue Agency’s (CRA) aggressiveness towards corporations’ TP documentation.

“Canada goes after everyone,” said Rolph.

The CRA’s request for TP adjustments depends on each particular case and individual transaction, according to Rolph.

TP audits in Canada will most likely require a company’s TP documentation 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,” explained Rolph.

However, the Canadian TP laws also lack specific regulations, according to Rolph. While the CRA recognises OECD guidelines, the laws do not incorporate the guidance itself.

Since OECD reports are not formally recognised by the Canadian courts, corporations are solely required to keep all records of non-arm’s-length transactions.

“It’s the law that matters and not the OECD guidelines,” said Rolph.

But tax authorities’ level of aggressiveness also depends on their resources, according to Rolph.

As opposed to the CRA, the Internal Revenue Service lacks resources to go after smaller firms when it comes to TP audits, meaning companies within this scope are less likely to be targeted by the US tax authority.

The US has strong TP laws in place, requiring taxpayers to maintain a range of information known as the principal and background documents. This can include anything from a description of the company’s organisational structure to an explanation of comparables used.

ITR’s Global Transfer Pricing Forum Europe is also taking place in Amsterdam, on September 28 and 29, and we will be bringing you more coverage from that event.

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