KPMG Covers Transfer Pricing Controversies

KPMG has released a publication on transfer pricing controversies, highlighting how tax authorities worldwide are relying on specific "red flags" to tighten their enforcement and audit efforts.

The publication, "A Meeting of Minds - Resolving Transfer Pricing Controversies," discusses the warning signs that tax authorities look for when they launch an investigation. They include unusually high profits or losses in a group company, sharp changes in profitability from prior years, corporate restructurings involving closures or reductions in operations, significant inter-company management fees, dealings with a group company in a tax haven, and location in a low-cost country.

Other warning signs include different prices and markups charged between related and unrelated parties for similar transactions, lack of sufficient documentation, high royalties with a licensee that has low profits or operating losses, royalties charged for intangibles that are not legally protected, and significant asset impairment charges.

Restructuring charges, inventory write-offs, significant year-end adjustment to inter-company prices, actual behavior not consistent with documented TP policy, closing costs when the company was making profits, and separation of functions and risks that does not make sense from a business perspective are further red flags.

The publication, which includes contributions from 39 KPMG authors in 19 countries, emphasizes that companies should take a systematic approach to setting and documenting their inter-company transactions. They should identify those transactions that may attract a tax authority's interest, prepare the necessary documentation, include a thorough transfer pricing policy document and decide what their objectives might be.

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