Transfer pricing perspectives: Winds of Change - PwC

To set the base for such strategy, the likelyoutcomes for the audit process need to beclearly understoodDevelop an audit strategyIn addition to the practical management ofthe audit process discussed above, in termsof meetings with the tax authorities andthe submission of requested information,an overall strategy for the audit needsto be developed. To set the base for suchstrategy, the likely outcomes for the auditprocess need to be clearly understood. Ifit is possible for the audit to be concludedwith no adjustment, then the audit strategyis likely to be focused on educating the taxauthorities about the reasonableness ofthe taxpayer’s transfer pricing proactively,so that the examination team can reachtheir conclusion as quickly and efficientlyas possible.In contrast, if the taxpayer may anticipatethat the ultimate conclusion of an audit willresult in an adjustment regardless of howreasonable the taxpayer’s tax or transferpricing policies are (frequently the casein certain Asian countries). In this casethe audit strategy is likely to be focusedon identifying those issues that are nonnegotiablefrom the taxpayer’s perspectiveand those on which the taxpayer may bewilling to compromise, with the ultimateaim of achieving the next best result tono assessment at all – that is, as small anassessment as possible. In a general taxaudit, the taxpayer may have a numberof issues upon which it is willing to makecertain compromises. The taxpayer maybe more willing, for example, to accept anadjustment on the reclassification of certainexpenses as non-deductible than it may bewilling to accept the examination team’sselection of an alternative transfer pricingmethodology or set of comparables leadingto a higher range of possible transferprices. In contrast, in a specialist transferpricing audit, the list of technical issuesmay provide less room for such negotiation,unless the taxpayer has multipleintercompany transactions. Nevertheless,it may still be possible to negotiate in suchcases, e.g. across taxable years rather thanon the technical issues covered by the audit.52 Transfer Pricing Perspectives. October 2011