Tax audits on transfer pricing have intensified significantly in recent years as a result of strengthened international cooperation, the implementation of the OECD’s BEPS project, and the automatic exchange of information between tax administrations. In this context, multinational groups face an environment of increased scrutiny, in which defending their transfer pricing policies requires rigorous technical preparation and a well-defined strategy.
This article analyzes the fundamental pillars for an effective defense of transfer pricing in an international tax audit, considering OECD standards, best practices, and criteria commonly used by tax authorities.
1. Importance of robust and consistent documentation
Transfer pricing documentation is the first line of defense in an audit. According to the OECD Guidelines, its main objective is to demonstrate that transactions between related parties have been carried out in accordance with the arm’s length principle.
Solid documentation must meet the following characteristics:
- Consistency between the group’s operational reality and the economic analysis.
- Clarity in the description of controlled transactions.
- Technical support for the selection of the transfer pricing method.
- Consistency between the local file, the master file, and the country-by-country report (where applicable).
Inconsistencies between these documents are often one of the main triggers for adjustments during an international audit.
2. Functional analysis: the basis of any technical defense
Functional analysis is a critical component of any transfer pricing audit. Tax authorities assess who performs key functions, who assumes significant risks, and who owns or controls the relevant assets.
Since the publication of BEPS Actions 8-10, the OECD has emphasized that the allocation of profits must be aligned with value creation, giving priority to economic substance over contractual form.
In practice, an effective defense requires:
- Evidence of actual control of risks.
- Justification of the remuneration allocated to each entity in the group.
- Demonstrating that intra-group contracts reflect the actual conduct of the parties.
3. Selection and proper application of the transfer pricing method
The choice of transfer pricing method is a recurring point of questioning during audits. The OECD Guidelines state that the method selected should be the most appropriate given the nature of the transaction and the availability of reliable information.
To strengthen the technical defense, it is advisable to:
- Explicitly justify why the chosen method is the most appropriate.
- Explain why other methods were ruled out.
- Ensure the correct application of the method in terms of the calculation basis, financial indicators, and periods analyzed.
Methodological errors or insufficient explanations often significantly weaken the taxpayer’s position.
4. Comparability analysis and selection of comparables
Comparability analysis is one of the most sensitive aspects of an international tax audit. Authorities often question:
- The search criteria used.
- The economic independence of comparable companies.
- The comparability adjustments applied (or lack thereof).
The OECD points out that comparability must be assessed by considering functions, risks, assets, contractual conditions, and economic circumstances. A solid defense requires methodological transparency and detailed documentation of each decision made in the benchmarking process.
5. Strategic audit management and interjurisdictional consistency
In international audits, audits are rarely limited to a single jurisdiction. The exchange of information between tax authorities increases the risk of correlative adjustments and double taxation.
Therefore, it is essential to:
- Maintain consistency in the transfer pricing position globally.
- Coordinate the defense between the different jurisdictions involved.
- Timely evaluate the use of dispute resolution mechanisms, such as mutual agreement procedures (MAPs) or APAs.
The OECD recognizes these mechanisms as fundamental tools for mitigating double taxation resulting from transfer pricing adjustments.
6. Preventive preparation: the best defense
Experience shows that the most effective defense begins before the audit. Regular review of transfer pricing policies, updating documentation, and risk assessment allow for the anticipation of potential challenges.
A well-implemented preventive strategy not only reduces tax contingencies but also strengthens the taxpayer’s position in complex and lengthy audit processes.
Conclusion
Defending transfer prices in an international tax audit requires much more than formal compliance with documentation. It requires a comprehensive strategy based on economic substance, global consistency, and technical rigor, aligned with OECD standards and international best practices.
In an environment of increasing scrutiny and transparency, companies that proactively manage their transfer pricing are better positioned to face audits, minimize risks, and avoid high-impact tax disputes.
Technical and strategic defense in transfer pricing
At TPC Group, we have extensive experience in preparing, reviewing, and defending transfer pricing studies in complex tax audits, both locally and internationally. Our approach combines technical rigor, regulatory knowledge, and strategic vision to protect the tax position of multinational groups and mitigate the risks of adjustments and double taxation.
Source: OECD