Podcast – TP audits: how to avoid the red flags that trigger scrutiny

Tax authorities “overwhelmed” by advance pricing agreement (APA) requests? Continued uncertainty over implementing amount B? The conundrum of valuing intangible assets? These are challenging times in transfer pricing (TP).

An ITR podcast draws insights into the above and more from three TP experts based in CMS’s European offices and explores the strategies multinational enterprises (MNEs) can adopt in response to heightened TP scrutiny. Some of the main talking points are outlined below.

The speakers all note significant recent shifts in the scale and nature of TP scrutiny, which necessitates a response from MNEs. Vittoria Segre, a partner at CMS Adonnino Ascoli & Cavasola Scamoni in Rome, has seen a marked rise in TP audits across companies of various sizes. “Compared to the past, when audits on transfer pricing were occasionally performed, the focus has grown enormously,” she says. “Nowadays, even small or medium-sized groups with limited presence abroad include transfer pricing in their risk management strategies.”

Audits increasingly examine whether an entity’s business profile aligns with its remuneration and whether its benchmark analysis uses truly comparable companies. Financial transactions such as loans and cash pooling arrangements are also under close review. “Typically, the tax authorities address conduct inconsistent with the key features of the chosen financial instrument,” Segre notes, adding that M&A transactions and changes in functional profiles are other triggers for investigation.

Mohamed Haj Taieb, a partner at CMS Francis Lefebvre Avocats in Paris, confirms a similar pattern in France. “Transfer pricing audits are increasingly aligned with international trends,” he says. “[Authorities are] focusing primarily on financial transactions, especially intercompany interest rates. We also have a lot of tax audits focusing on intangible assets and the manner that intangibles are remunerated within international groups.”

Andréa Rizk, an associate at CMS Francis Lefebvre Avocats, also notes that “documentation, which used to be requested only in selected cases, is now a regular feature of tax audits”. Together with the valuation of intangibles, this invites a deeper discussion.

A lack of TP documentation is highlighted as a red flag for auditors. “Maintaining robust and contemporary documentation is really the best way to defend your transfer pricing policy,” Rizk says. “This comes with a good description of the functional analysis of the company in the documentation and making sure that what is presented in the different elements that the company discloses – for example, statutory accounts, tax returns, country-by-country reporting – are consistent with what is said in the transfer pricing documentation and what the company does.”

The point is echoed by Segre. “In Italy, the main red flag is the absence of transfer pricing documentation, the possession of which is disclosed in the tax return," she says. "Although TP documentation is not mandatory in Italy, if it is prepared within the required timeframe, and if it is complete and compliant with the TP guidelines, it allows the taxpayer to benefit from protection against administrative and criminal penalties.”

Valuing intangible and digital assets remains one of the most complex aspects of TP compliance. Haj Taieb identifies the distinction between legal and economic ownership as a key factor. “If you are the legal owner of an intangible [asset], this doesn’t mean you should be entitled to a large part of the value creation,” he says. “The guidelines require that profit should be allocated based on the actual actions or performance of DEMPE functions. You should accurately identify which entities within the group contribute largely to the value creation of the intangible.”

Haj Taieb goes on to suggest that TP is no longer just a tax issue – it is a strategic one. But what does that mean at an organisational level? “[The TP] approach should be coordinated with departments like HR and legal,” he says. “From an HR standpoint, the employee location and the organisational roles are very important in the functional analysis, because functions are performed by people and if we have functions, we have profits. So the role of an HR department is very crucial.”

Segre adds that technology, especially AI, is transforming how tax authorities and taxpayers approach audits. “AI can analyse large volumes of taxpayers’ data, identify specific risk areas within an audit, and even suggest lines of enquiry," she says. "The use of AI could represent a real change in terms of audit methodology for the tax authorities."

APAs can offer welcome certainty for taxpayers, but several potential downsides are raised during the podcast. “According to the most recent EU statistics, the average time taken to close a bilateral APA in Italy is between 31 and 42 months [for EU and non-EU states, respectively], which is undoubtedly an issue," Segre says. "Despite the length, one of the main benefit lies in the fact that, in many countries, APAs can be applied retroactively to prior periods, thus covering up to 8–10 years."

Lengthy APA resolutions are not unique to Italy. Bilateral APAs take an average of 46 months to complete in France, during which an MNE may undergo substantial structural and functional change. Confidentiality is another concern. “Our clients usually ask the question, ‘Is the APA unit keeping the information only at their level or will they share this information with other departments within the tax administration?’” Haj Taieb says. “That can raise some concerns for multinational enterprises, especially when the APA involves strategic or commercially sensitive information.

“This is a resource-intensive process. And it lasts a long period. So there is a risk during this time of negotiation that the business model of the group could evolve. But we think that it is a good strategy to reduce risk and we appeal to clients to go into an APA process.”

Aside from APAs, the OECD’s amount B proposal is another double-edged sword. The initiative aims to simplify TP for baseline distribution transactions, but Rizk is cautious about its real-world impact. “France has decided not to implement amount B yet,” she says, referring to administrative guidance issued on July 23 2025. “However, it honours its political commitment and respects the results that will be obtained when a country [does] apply amount B. It’s interesting to note that the French position is not isolated, as Germany, Japan, Australia, New Zealand, and the Netherlands have published administrative instructions to this effect.”

What does the future hold for the proposal? “Amount B has many positive aspects,” Rizk says. “It’s a meaningful step towards simplification and predictability in transfer pricing for routine distributors. However, without the support of the majority of jurisdictions, the implementation cannot really move forward.”

The speakers emphasise that TP has evolved far beyond a technical matter of fulfilling regulatory requirements. “Transfer pricing is not a formal compliance exercise; it’s a crucial aspect of management control that impacts profitability, performance, evaluation, and overall strategy," Segre says. "It has a precise life cycle: it starts with strategy and price setting, continues with monitoring and adjustments, and only ends with TP documentation."

Rizk agrees that the strategic considerations relating to TP are now front of mind for many MNEs. “Businesses are increasingly seeking certainty on their transfer pricing positions to facilitate more predictability,” she says. “This is evidenced by a surge in levels of interest in advance pricing agreements and dispute resolution programmes.”

In an environment of heightened TP scrutiny, this proactive approach appears essential to avoid red flags.