Stay ahead of the curve: assessing and managing transfer pricing risk – part two
Yasmine Hammad of Saleh, Barsoum & Abdel Aziz – Grant Thornton Egypt concludes a two-part series that focuses on transfer pricing from an Egyptian perspective by explaining the main factors that companies should consider.
As indicated in the first article in this series, transfer pricing sometimes becomes burdensome for companies, particularly those with huge related-party volumes, or those new to the transfer pricing process and life cycle as a whole. More often than not, assessing your transfer pricing overall practices and potential risks is a necessary exercise, rather than a nice-to-do one, to be able to anticipate those issues that may trigger an audit and accordingly prepare for potential enquiries/challenges from the authorities.
Key considerations for companies
Companies are therefore advised to run a transfer pricing healthcheck to consider:
Whether your related-party transactions are priced at arm’s length;
Whether arm’s-length policies are in place but not being correctly implemented, leading to transfer mispricing;
Whether any of the transfer pricing risks described in the first article in this series apply to your related-party dealings and any required actions; and
An assessment of the quality of your entire documentation process.
The outcome of this exercise will help you to determine whether your transfer pricing policies and practices should be revisited or improved to avoid the likelihood of a transfer pricing adjustment if the company is under audit.
Transfer pricing healthchecks: how can you assess and potentially mitigate your transfer pricing risks?
Transfer pricing healthchecks are an effective tool for companies to manage transfer pricing controversy, whether before or during audits.
Managing transfer pricing controversy during audits
It is often the case that companies consider performing this exercise, in the form of an audit package assessment, when they receive enquiries from the tax authority, or when their file is officially selected for a transfer pricing audit. The exercise helps companies to understand their overall compliance/risk position and the likelihood to conclude an audit with clean versus adjusted results.
Yet, by that time, it is most likely the case that for certain issues, potential corrective actions identified as a result of the assessment cannot be performed due to timing, or documents already submitted to the tax authority.
Managing transfer pricing controversy before audits
In light of the increased scrutiny from the tax authorities in the field of transfer pricing, some companies run transfer pricing healthchecks ahead of any enquiries from the tax authorities, and companies are strongly recommended to run a transfer pricing healthcheck if they have not done so recently. The healthcheck should assess potential risk areas that may give rise to an adjustment in the event of an audit, and ensure a proper risk mitigation plan is in place to ultimately be prepared as and when an audit occurs.
This, in a way, could serve as a dispute prevention mechanism by proactive planning and preparation to minimise disputes, documenting and preparing evidence and defence files, and developing strategic controversy-aware transfer pricing policies.
While transfer pricing is fact- and circumstance-based, and associated operations/transactions vary widely in many forms and at many levels, an in-company transfer pricing healthcheck generally follows a common structure, typically run with the help of your transfer pricing adviser, and involves the following steps:
Collecting quantitative data from various resources, including corporate tax returns, statutory financial statements, and company reports;
Identifying risk factors by analysing the collected quantitative data;
Where needed, reviewing and assessing the existing transfer pricing supporting documentation, primarily encompassing documentation reports, and related-party agreements;
Assessing alignment of transfer pricing policies with the arm’s length principle, and whether those are correctly implemented;
Reviewing qualitative information and gathering additional information from public resources;
Review and detailed quantification of potential risks;
Assigning a risk rating per identified risk category and proposing a risk mitigation strategy/potential corrective action, as needed, such as a change in transfer pricing policies and calculating tax provisions; and
Developing an action plan for risk mitigation.
The transfer pricing landscape in Egypt is fast evolving, and is largely aligned with the global standards and how other countries within a group would be required to conduct their transfer pricing. Companies therefore need to monitor those developments closely to ensure the implementation of sound transfer pricing practices and reduce the likelihood of transfer pricing scrutiny from the tax authorities.
Egypt has dramatically modified its legislative framework and audit practice, including developing a transfer pricing audit process that starts from a thorough risk assessment upon which critical audit decisions are based. With such capabilities, companies in Egypt are advised to take their compliance seriously and assess their overall transfer pricing positions.
It is therefore crucial that companies take a step back and consider whether their related-party transactions are priced at arm’s length, review and analyse those transactions, and consider whether changes are required to existing transfer pricing policies, to assess if pricing is expected to give rise to adjustments in the event of an audit.
It is suggested that companies start looking at the processes and documentation that already exist to review their risk factors, think about risk mitigation strategies and/or potential corrective actions, and develop a suitable action plan for their business. They should look at resource levels in each area, and existing and needed processes.