Quality control in Transfer Pricing
By Carlos Camacho, Global Transfer Pricing Leader
In the scope of transfer pricing, quality control is performed by means of a health check of the processes executed. It consists of evaluating the documentation prepared to support the position of the party-client, which has entrusted the responsibility of preparing the transfer pricing documentation.
It is a well-known fact that, given their volume, many companies have teams dedicated to:
- Preparing transfer pricing policies
- Sustaining the main components of the value chain
- Aligning their material reality with points a. and b. above
- Preparing the documentation known as the local file or transfer pricing study
- Where applicable, preparing and submitting transfer pricing reports in the jurisdictions in which their entities operate
- Preparing and updating the master file of the group’s duties, risks, and assets associated with the value chain and income allocation policies
- Where applicable, submitting proposals for transfer pricing pre-agreements to local tax authorities for consideration
- Preparing country-by-country reports where annual income limits are exceeded, in accordance with BEPS 13 regulations
- Complying with the requirements of the administrative order phase, as well as specific or general tax audits with issues related to transfer pricing
- Providing technical support to legal teams responsible for representing and litigating transfer pricing for the proper defence of the interests of groups with multinational transactions
- Complying with the requirements of external auditors and competent authorities concerning transactions with related parties.
Many small, medium, and even large enterprises simply do not have or cannot afford specialised resources to evaluate such a broad array of transfer pricing issues and so opt to outsource some or all of the aforementioned processes and responsibilities.
However, due to the complexity of the information to be analysed and prepared, as well as the short amount of time available to meet most of the obligations, it is necessary to establish quality assurance processes of core business aspects that may have critical consequences if not adequately addressed.
The health check or quality control policy is an appropriate and timely response that will allow, if necessary, for timely correction at the internal level based on an expert and constructive perspective.
The health check becomes even more relevant given the combination of resources that companies use to cover their transfer prices, whether internal or mixed resources with specialized professionals or firms and the different casuistries that may arise from these combinations.
The diversity of topics related to transfer pricing requires the creation of quality control policies, such as internal or external peers performing critical assessments, known as the “sanity check.”
The “sanity check” requires a mental independence regarding the case under analysis. The consultant must put him- or herself in the shoes of a critical, advanced Tax Administrator and must verify and detect, in both the disclosures made and in any omissions, as applicable, the areas of weakness of the potential contributor, resulting in opportunities for improvement to the procedure applied or to the documentation submitted or to be submitted to tax authorities.
Alternatively, the process should be conducted under one of the following approaches:
- A sanity check as part of a continuous improvement process for professional groups with sufficient internal resources to execute their transfer pricing actions, so that critical phases and milestones are constantly monitored to achieve results consistent with mandatory professional quality standards.
- As a service to multinational groups that have their own teams to prepare all or some of the aforementioned requirements, bringing independent eyes to offer process improvements and to adequately and expertly see the reasonableness of what may be obvious to some, but who, immersed in the processes, fail to transmit through their results everything the competent authority must know in due form and time, as applicable.
- As a service to companies that because of their size or workload and the resulting limitation to available resources lack the ability to conduct quality assurance procedures internally, which results in an increased risk to their services and, consequently, exposure to their customers.
Our HLB Transfer Pricing experts are on hand to perform ‘sanity checks’ for your organisation. Get in touch with us to discuss your global transfer pricing needs.