Transfer Pricing

Transfer Pricing

Posts 1-4 of 4
  • Horst Richter
    Horst Richter    Premium Member
    The company name is only visible to registered members.
    Tax audit experience - please share your experience
    Gentlemen,

    for more than 8 years I work as interim manager and as a consultant for transfer pricing documentations. What I saw was nearly always the same. And I would like to share my experience with you.

    First of all my statement for the discussion:

    "The usual tax motivated prosa documentations, LDRs and other contracts between related parties are very expensive and work intensive means without nearly no value for the TP Documentation nor for the company. It is a worthless alibi, costly protected during the tax audit.

    The core of the TP documentation is in most cases still unsolved and the tax risk in connection with the transfer prices reduces only marginally.

    A real TP documentation has its source in an efficient sales and product cost controlling.

    Controlling – Information at the cutting-edge fulfills both the transfer pricing documentation requirements of the national tax authorities and reduces the inherent tax risks coming from transfer prices."

    Background information for my statement:

    The elements of a typical transfer pricing documentation I saw, were Arm's length explanation of transactions and prices. A fine prosa documentation. (refer to Sample of a Documentation in this forum). Comparable studies and inter-company contracts especially on LDRs, intercompany services and license agreements. In addition I saw invoices from consulting firms for all these services.

    In 2004 I had a customer, a global group company. They asked me for advice as they were uncertain on the advice they got from their tax advisor. We had a small workshop meeting. The outcome was to develop a controlling based transfer pricing documentation.

    My customer followed my advice although the tax advisor recommended to follow the General Principles (what are those?) of a documentation.

    Last summer (2009) my customer had the state tax audit. The outcome was brilliant and they passed the audit on transfer pricing without any additional payments.

    During an interim management project a year before I had to deal with the" prosa transfer pricing documentation" which I usually saw. It was extremely hard to pass the audit. And, the tax inspector got a good financial outcome from the audit. Please note, the customer had prepared the documentation in the "prosa manner" which followed the General sample of a documentation.

    In my last TP project my customer asked me, to prepare a prosa documentation. Nothing else. And, only a few calculations and reports from the corporate controlling (SAP-BW data). Although I pointed out that tax auditors are only interested in calculations and figures from the accounting and controlling the customer mentioned that their tax advisors had asked them to prepare the sample documentation.
    You can imagine what happened to me in the project –David against Goliath. But, in this fight Goliath was the stronger one.

    Having said this, I would like to hear your comments.

    What do you think about my statement? Please share your experience.

    Kind regards,

    Horst Richter
    • 04 Feb 2010, 2:38 pm
  • Post visible to registered members
  • Horst Richter
    Horst Richter    Premium Member
    The company name is only visible to registered members.
    Re^2: Tax audit experience - please share your experience
    Dear Mr. Wilcke,

    Thank you for your answer. But, this is nearly the same answer I got a few years ago. And this is the reason why I raised the question about TP tax audit experience in this forum.

    Let me summarize before I go into details: I would like to know the experience of you and other experts during a tax audit on TP. What is the trend? Do tax auditors put more pressure on TP? This is what I would like to know.

    And here is my direct answer – let’s make a productive discussion. I don’t want to offend you. I only want to find out what the trend in TP tax audits is.

    Why does a controlling based documentation place high requirements on the controlling department? I think all information you need is more or less available from IAS.

    Let’s have a look at IAS, e.g. IAS 2 (Inventories). We have merchandise, production supplies, materials, work in progress and finished goods.

    In many group companies we have to apply specific identification of individual cost (IAS 2.23) if the items are not ordinarily interchangeable. Machine production, chemical industry or automotive supply (and many other companies reporting IFRS) have to deal with this rule.

    High level profit based analysis I agree are enough for serial production but don’t we have even in these cases a grouping of products, e.g. production supplies from a related company (A) and materials from another related company (B)?

    The questions I’m addressing here are the same I had to deal with in the tax audit.

    My point is that general accounting rules under IAS require more information than only high level information. Companies when they for example classify expenses by nature need to explain cost of production in the notes (IAS 2.39). We have also the rule like costs directly related to the units of production (IAS 2.12) etc. etc.

    What I’m saying here we have accounting rules to be followed. But, how can we follow those rules if we do not have an information base which supports these reporting requirements and, also the TP documentation.

    Hence, I do not agree with your argument that controlling based information is not available. As interim manager I’ve worked for various group companies in the corporate controlling. Even in the one which later got tax audited. The company had an excellent reporting and controlling. But, tax department and corporate controlling had a different understanding about transfer prices.

    The reason why they produced a documentation based on high level profit based analysis was the tax department. They didn’t want to set up a detailed reporting for the TP documentation. They wanted a simple system supported by comparable studies prooving arm's length.

    Later, when it came to the tax audit the argument of the tax department was “…we didn’t know that you’re able to produce better analysis…We thought it’s too much work for you to produce…”
    Sorry, but tax departments have to learn that Transfer pricing is a question of controlling – which makes life much easier in a TP tax audit. Tax departments should only support the TP project.

    And, I don’t want to make the discussion too academic but I think group companies will run more and more into conflicts with the year end auditors as well as with the tax auditors if they can’t proove their production costs.

    My experience during those two tax audits I had to deal with and which I refer to results in the following conclusion:

    If we follow the high-level profit analysis further on in the TP documentation companies will run into serious and expensive problems during the tax audits. Or, if they do not fail they’ll have long lasting discussions with the tax auditor –being more and more specialised - and will spend lots of resources and money in the protection of the TP documentation prepared on the high level approach.

    It is better to take the information we always find in (group) companies. And, even if their controlling is not the best as you say they have following information available:

    Inter-company invoices, the sending and the receiving party, the production cost (at least on product group level), the mark-up applied on the inter-company goods sold (from the debtor accounts or from the consolidation department). We also have the COGS resulting from inter-company supplies.

    Based on this information I can say even from my business experience it is easy to prepare a controlling based documentation which is very hard to attack if the tax auditor looks at the TP documentation. I have the proof for it from the other tax audit which was easier to manage as we could easily provide the calculation from the controlling. I also have to say the audit was much tougher compared to the first one.

    Kind regards,

    Horst Richter
    • 08 Feb 2010, 7:17 pm
  • Post visible to registered members