The process of auditing transfer pricing has undergone substantial changes in recent years. Tax authorities no longer focus their analysis exclusively on the selection of the method or the arithmetic validation of margins within an interquartile range, but rather comprehensively evaluate the economic consistency of the transfer pricing model adopted by the taxpayer.
In this context, the experience of HM Revenue & Customs (HMRC) in the United Kingdom is particularly illustrative. Its publication “Common compliance risks – Part 2” compiles, from an audit perspective, the technical errors that most frequently undermine taxpayers’ defensive positions during audits and disputes. These are not theoretical guidelines, but observations derived from actual reviews, making this document a relevant reference for multinational groups operating under OECD standards.
This article discusses these risks from a technical perspective, emphasizing the aspects that, in practice, generate significant tax contingencies.
Compliance risk as a structural, not a methodological, problem
From HMRC’s perspective, transfer pricing compliance risk rarely arises from a reasonable difference in technical interpretation. In most cases, such risk arises when the analysis lacks structural consistency, i.e., when the various components of the study do not converge toward the same economic interpretation of the business.
The tax authority assesses whether there is alignment between the way the group describes its operating model, the delimitation of controlled transactions, the functional characterization of entities, and the reported financial results. When these elements are not consistent with each other, the analysis loses credibility, even if it formally complies with the documentary requirements.
This approach reflects a significant change: taxation is no longer a formal validation exercise but a substantive assessment of the underlying economic logic.
In this context, the HMRC publication includes observations and practical recommendations aimed at reducing the compliance risks associated with these areas, among which the following stand out:
1. Compliance planning as the source of multiple contingencies
One of the aspects that HMRC identifies as an early trigger of risk is poor planning of transfer pricing analysis. In many cases, inconsistencies observed at later stages can be explained by decisions made in the initial phase of the study.
The problem lies not only in omitting transactions, but also in failing to adequately understand how value is created within the group. When the scope of the analysis is defined without a thorough understanding of the value chain, there is a risk of analyzing operations in isolation, without considering their economic interdependence.
HMRC notes that such deficiencies are common in groups that replicate historical analysis structures without reevaluating them in light of reorganizations, changes in key functions, or reassignments of strategic responsibilities. The result is a study that is technically flawed from the outset.
2. Functional analysis: the point of greatest technical scrutiny
Functional analysis is probably the central focus of HMRC’s observations. It is not a question of the extent of the analysis, but rather its ability to accurately reflect the operational reality of the group.
The tax authority particularly questions analyses that describe functions and risks in generic terms, without explaining how relevant decisions are made or who exercises effective control over economically significant risks. On this point, HMRC clearly aligns itself with the OECD’s approach, which requires identifying not only who contractually assumes a risk, but also who controls it and has the financial capacity to bear it.
When the functional characterization is not related to the results obtained by the entities analyzed, the authority interprets this inconsistency as a clear indicator of noncompliance risk.
3. Comparability: when the analysis becomes mechanical
Comparability analysis is another area where HMRC identifies recurring weaknesses. The problem is not the use of commercial databases, but rather the uncritical use of available information, without sound economic reasoning to support the final selection of comparables.
In this context, HMRC frequently observes:
- comparables that do not reflect the actual functional profile of the entity analyzed,
- superficial qualitative descriptions,
- and comparability adjustments applied without verifiable technical justification.
This is one of the few areas where a list is relevant, as it summarizes repeated patterns of observation. However, the underlying criticism is conceptual: comparability cannot be reduced to a statistical exercise, but must be the logical consequence of a correct delimitation of the transaction and a robust functional characterization.
4. Application of the method and consistency of calculations
HMRC also identifies significant risks in the method application phase, even when the methodological selection is, in abstract terms, appropriate. Observations on this point are usually technical and detailed, and become particularly relevant in in-depth audits.
The most significant inconsistencies arise when the calculations are not fully reconcilable with local accounting information or when the financial indicators used are not consistent between the analyzed party and comparable companies. Likewise, the authority pays special attention to adjustments made at the end of the fiscal year that appear to be aimed solely at positioning the results within the range, without a reasonable economic explanation.
Such practices substantially weaken the taxpayer’s defensive position.
5. Documentation out of step with economic reality
A cross-cutting risk identified by HMRC is the mismatch between transfer pricing documentation and actual business operations. This problem arises when studies contain contractual narratives or functional descriptions that no longer reflect how intra-group transactions are actually carried out.
From the tax authority’s perspective, documentation must evolve at the same pace as the business. The absence of updates in the face of relevant changes in the value chain is interpreted as a sign of merely formal compliance, lacking economic substance.
Practical implications for multinational groups
HMRC’s experience confirms that tax administrations are converging towards increasingly sophisticated review standards. In this environment, transfer pricing risks are no longer explained solely by methodological decisions, but by structural deficiencies in the construction of the analysis.
For multinational groups, this implies the need to adopt a more rigorous technical approach, in which the internal consistency of the study, alignment with operational reality, and the quality of economic reasoning are decisive for the sustainability of compliance.
Anticipating risks to sustain compliance in an environment of greater scrutiny
HMRC’s identification of common compliance risks highlights a definitive shift in transfer pricing enforcement. The emphasis is no longer on formal compliance, but on the technical robustness of the analysis and its ability to accurately reflect the economic reality of the business.
In this context, anticipating the risks associated with planning, functional analysis, comparability, and the application of the method becomes a key element in reducing contingencies and strengthening the defensive position against audits and tax disputes.
At TPC Group, we advise multinational groups on the technical and structural evaluation of their transfer pricing policies and studies, with a focus on preventive risk management and sustainable compliance across multiple jurisdictions.
Source: GOV.UK