EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.
Recent Searches
Following the pandemic lockdowns and the re-opening of the economy, tax authorities (TAs) all over the world intensified their tax audits, performing them in a more rigorous way, in an attempt to collect additional tax revenues. There are certain recommended steps that businesses should proactively take, in order to manage more effectively a transfer pricing (TP) audit and defend their TP model in a more efficient manner.
How do tax authorities approach transfer pricing audits?
For taxpayers, TP is one of the riskiest areas of compliance, considering the closer scrutiny by TAs, in alignment with their audit strategy. Specifically, the Greek Independent Authority for Public Revenue (IAPR):
- has included the collection of tax revenue amounting to €35 mil. resulting from TP audits using the AMADEUS database, in the targets established within its 2021 Operational Plan, as well as
- the audit of 220 TP cases.
In addition, another target of the IAPR’s operational plan is the continuation of the Greek TAs involvement in five ongoing multi-lateral control audits.
Further to the above, a specially-qualified audit team has been established within the Audit Authority for Large Enterprises, for auditing benchmarking studies included in TP Documentation Files (TDF), due to the tax area’s significance and the necessity of a specialized technical background to this end.
What does the tax audit focus on?
Taking into account the audit steps stipulated in Decision POL.1124/2015, transfer pricing audits mainly focus on the following:
|
A |
Does the entity fall under the obligation to prepare a TP documentation file and submit a Summary Information Table (SIT), as per the provisions of Article 21, L. 4174/2013? |
|---|---|
|
A.1 |
Has the entity indeed prepared a TDF regarding its intra-group transactions, as indicated by the relevant provisions? |
|
A.2 |
Has the entity electronically submitted its SIT to the General Secretariat for Information Systems of the Ministry of Finance? |
|
B |
Does the TDF prepared contain all necessary elements, as described in the relevant provisions? |
|
B.1 |
Has a traditional TP method been applied and -if yes- which one? |
|
B.2 |
In case a transactional TP method has been applied, has the rejection of the traditional TP methods and, accordingly, the choice of a transactional -or other- method been properly and sufficiently justified? |
|
B.3 |
Has a sufficient Functional Analysis been performed? |
|
B.4 |
Have the proper comparable data (internal or external) been identified, in order for the intra-group transactions to be accurately documented? |
|
B.5 |
In case external comparable data have been used, is the source (or database), from which those data were derived, indicated? |
|
B.6 |
Is the method of determining the final sample of comparables provided? |
|
B.7 |
Are the intra-group prices or the margins achieved from the intra-group transactions (as presented in the books and records of the taxpayer) in line with the “Arm’s Length Principle”? |
|
B.8 |
Has there been a tax adjustment of the entity’s tax results based on differences resulting from the application of open or free market conditions or the “Arm’s Length Principle”? |
|
B.9 |
Has there been any business restructuring affecting the group, within the audited fiscal year? |
|
B.9.1 |
Does the business restructuring qualify as a “transfer package”, as defined in Article 51, L. 4172/2013? |
|
B.9.2 |
Was the transfer performed in accordance with the “Arm’s Length Principle”? |
|
C |
Has the SIT been submitted timely? |
|
D |
Are there agreements in place with regard to the entity’s intra-group transactions? |
|
D.1 |
If yes, have the contractual terms been adhered to? |
|
E |
Are there any Advanced Pricing Agreements (APAs) in place covering transactions with affiliated companies or Permanent Establishments? |
|
E.1 |
Have the terms of the APA been adhered to? |
|
E.2 |
Are the critical assumptions, based on which the APA was concluded, still in force and accurate? |
|
E.3 |
Has the annual compliance report regarding the adherence to the terms and conditions of the APA been submitted? |
Which areas should businesses look out for?
In view of above audit steps and, in order for taxpayers to walk in a TP audit with confidence, the following key areas should be considered:
- It seems that a basic TDF with minimum documentation content is not enough – particularly for non-routine transactions;
- Along with the TDF that a company should submit to the TAs, a defense file should be also be ready in advance.
Further to that, the following remarks are listed based on our TP documentation and TP controversy experience, as well as the most commonly encountered findings of the TAs:
- Thorough justification for the selection of the TP method and the rejection of the corresponding TP methods: Our experience has shown that no adequate analysis is being performed on said section, but rather a typical and short analysis.
- Detailed functional analysis as per the guidance of the OECD and the local TP rules: It has been observed that there is room for improvement when it comes to this critical section, which is at the heart of the comparability analysis.
- Examination whether internal comparables may be used: Internal comparables -when they exist- tend to be rejected easily without deeper examination as to whether they could be used with the appropriate adjustments.
- Detailed analysis for the selection of external comparables along with detailed comments for the rejection of external comparables: In the vast majority of the cases, there is only one line of comments for the above, which obviously does not seem adequate. This is a crucial area upon review of benchmarking studies, since potential removal of one company on the upper or lower end, may lead to substantial result changes. A sensitivity analysis (sanity check) in this area seems the best way forward for assessing in advance any risks.
The role of the Defense File
Based on our experience working closely with companies all over Greece, we have noticed that taxpayers who had already prepared a Defense File, upon a tax audit:
a.chieved better results, as well as
b. saved internal resources in the process of collecting the required information/data in a timely manner.
Indicatively, such a file may contain:
1. The reconciliation of I/C transactions’ amounts included in the TP file, with company books.
This is a necessary step as material discrepancies between the I/C amounts in the TP file and company books will result to penalties related to the SIT (i.e. an annual listing obligation), as well as leaving a negative footprint for the preparation quality of the TP doc file.
2. A review whether the contractual terms apply in practice as being depicted in the TP doc file.
It is of outmost importance that agreements in place accurately reflect the Functions-Risk-Assets analysis (FAR) by parties, and for this to be reflected in practice. This builds credibility and enhances the TP position of the company, as differences between agreements and the implementation, apart from leading to potential TP adjustments, give the impression of a poorly established and executed TP policy to the auditor.
Takeaway
The takeaway for businesses is that they should be proactive, by not only having a local TP file in place, but also maintaining a defense file against the above checklist, with focus on the reconciliation and agreements. This will help them approach a TP audit with more safety and confidence.
* The above is an English rendition of Christos Bourkoulas’s article originally published on capital.gr, on 15 March 2022.
Summary
Following the pandemic lockdowns and the re-opening of the economy, tax authorities (TAs) all over the world intensified their tax audits, performing them in a more rigorous way, in an attempt to collect additional tax revenues. There are certain recommended steps that businesses should proactively take, in order to manage more effectively a transfer pricing (TP) audit and defend their TP model in a more efficient manner.