Arcotia Hatsidimitris - International Tax Dialogue

ANNEX D – 101
Annex D: Transfer pricing risk identification and assessment:
the perspective of an advisor of MNE’s
Risk indicators for transfer pricing
Businesses engaged in certain activities raise their risk profile. A number of these activities are
indicators of the potential for incorrect transfer pricing, depending on the facts and circumstances of
each case:
• Intangible assets utilised by group companies but no royalty paid.
• Cost sharing with no foreseeable benefit.
• Companies involved in transactions that might be overlooked.
• Companies making losses over a number of years.
• Sustained losses by local entities, but (overall) profits in the group.
• Margins suddenly decrease with no rationale.
• Companies with overseas subsidiaries with start-up losses.
• No formal agreement for services or finance provision with no recharge of costs.
• Secondments undertaken on “un-commercial” terms (i.e. no recharge and no agreements).
• UK companies with related party transactions where the related party has a low marginal tax
rate and makes payments which appear to be large in reference to the relationship.
• Debt levels, intra-group loans and guarantees that are “un-commercial”.
• Trading debtor balances – intercompany, long term, interest free.
• Dormant companies with intercompany creditors and net assets/investments.
There are additional risk indicators flagged by tax authorities as requiring audit. Presence of
these indicators does not, of itself, imply that the transfer pricing of the business is necessarily
incorrect:
• Companies paying large management fees or paying royalties or other charges for the use of
intellectual property.
• Companies undertaking contract R&D on a cost plus basis – tax authorities may challenge
the basis of remuneration and argue that a local country is contributing towards the creation
of an intangible.
DEALING EFFECTIVELY WITH THE CHALLENGES OF TRANSFER PRICING © OECD 2012