Transfer pricing audit – how to limit tax risk in a capital group

The tax environment in which businesses operate today is becoming increasingly complex and demanding. This is particularly evident for entities operating within capital groups, where, in addition to the day-to-day conduct of business activities, it is also necessary to consciously manage settlements between related parties. In practice, this means that merely fulfilling formal obligations – such as preparing transfer pricing documentation or reporting transactions – is not always sufficient to limit tax risk. 

Increasing importance is therefore attached to analysing which transactions carried out within the group may attract the attention of tax authorities, what information is reported to the tax administration and, consequently, where a business – often unintentionally – may disclose potential areas of risk. 

In this context, it is worth considering whether a transfer pricing audit may serve as a tool enabling the identification and more effective management of such risks. 

What is a transfer pricing audit? 

A transfer pricing audit involves verifying relationships between entities and conducting a comprehensive analysis of transactions carried out with related parties in terms of their arm’s length nature and compliance with applicable tax regulations. 

The audit is conducted based on a range of sources that allow transactions and processes within the company to be verified in detail, including: 

• • Local File and Master File, 

• • TPR form, 

• • existing agreements and other documents containing arrangements between related parties, 

• • information published by the company in publicly available sources, such as its website, 

• • financial statements. 

By using the above sources, a transfer pricing audit makes it possible to analyse flows between related parties more broadly than solely in the context of formal documentation. 

Purpose of a transfer pricing audit 

The main objectives of the audit may be divided into four key areas: 

• • Identification of risks – analysing transactions with related parties makes it possible to identify areas that may generate potential tax risks both for the company and for individuals responsible for its financial affairs (in particular Members of the Management Board). The audit also enables an assessment of the level of such risks and their potential consequences. 

• • Preparation for a tax audit – the audit allows documentation and processes to be organised in advance, increasing the taxpayer’s readiness for potential questions from tax authorities. As a result, individuals responsible for the company’s tax and financial matters do not have to act under time pressure or risk making mistakes resulting from haste. 

• • Correction of irregularities prior to intervention by the tax authorities – early identification of errors or inconsistencies and the implementation of appropriate changes allow the risk of additional tax liabilities and penalties imposed by the tax authorities to be reduced. 

• • Consistency of the taxpayer’s data – the audit makes it possible to verify the consistency of data presented in documentation, financial statements and other materials. As a result, the information contained therein remains coherent and can be clearly reconciled, which facilitates verification and reduces the risk of ambiguity. 

When is the best time to conduct a TP audit? 

Based on our experience, a good time to carry out an audit is the period preceding the preparation of transfer pricing documentation and benchmarking studies for the following tax year. However, we also recommend conducting it even before filing the CIT return or in parallel with the preparation of financial statements. Such an approach also makes it possible to verify the consistency of the reported data. 

This enables potential irregularities to be identified sufficiently early and – where necessary – corrections to be introduced before the data is reported to the tax authorities. In such circumstances, the audit acts as a form of “second look” at the processes and documentation within the company, thereby enhancing tax security and supporting individuals responsible for transfer pricing and finance in minimising risks, including potential consequences under the Fiscal Penal Code. 

The most common errors identified during an audit 

The scope of irregularities that may be identified during a transfer pricing audit depends on the specific nature of the entity’s operations, the industry and the entire capital group. Based on our experience, the areas most frequently requiring attention include: 

• • Failure to properly identify transfer pricing obligations – incorrect identification of related parties (e.g. failure to consider personal relationships) and incorrect identification of transactions subject to documentation requirements (e.g. omission of atypical categories such as share capital increases or application of  incorrect threshold). 

• • Inconsistency between documentation and the actual economic conduct of the parties – documentation may not reflect the company’s actual activities or the way transactions are carried out. Discrepancies often arise between the Local File and information presented by the taxpayer in other documents, such as the Master File or financial statements. In addition, contractual provisions may be outdated or inconsistent with the current settlement model, which may raise concerns for tax authorities during an audit. 

• • Results falling outside the arm’s length range without appropriate justification – if the result of a transaction falls outside the arm’s length range determined through a benchmarking study, the reasons for such deviation should always be analysed. In practice, this requires gathering appropriate arguments and documentation supporting the achieved result. 

• • Lack of economic justification and evidence for purchased intangible services (the so-called benefit test), such as management services – this is one of the areas that has recently attracted particular attention from tax authorities. The audit makes it possible to verify whether the acquired intangible services generate economic benefits for the company and whether sufficient evidence confirming their performance is available. 

• • Incorrect allocation of functions, assets and risks – improper determination of which company within the group bears economic risk or which assets and functions are involved in the transactions may lead to remuneration being established in a manner inconsistent with the functional profiles of the parties to the transaction. 

• • Improper benchmarking study – selection of an inappropriate transfer pricing method, lack of justification for the adopted method or selected indicator, or reliance on outdated data. A properly conducted benchmarking study is crucial to demonstrating the arm’s length nature of settlements. 

• • Incomplete transfer pricing documentation – failure to meet all formal requirements makes it difficult to understand the context of the transaction and may give rise to additional questions from tax authorities.  This deficiency occurs particularly when documentation is prepared centrally without taking local specificities into account. 

Transfer pricing audit – is it worth conducting one? 

A transfer pricing audit allows settlements between related parties to be analysed more broadly than solely through the lens of formal documentation obligations. Through the analysis of documentation, financial data and the actual course of transactions, potential tax risks can be identified at an early stage, processes may be organised, and the company may be better prepared for a possible tax audit. In practice, it serves as a tool supporting conscious risk management within a capital group and increasing the tax security of the business. 

Identifying such irregularities during an audit allows the taxpayer to correct them in advance and establish the correct approach to settlements between related parties, thereby minimising the risk of potential tax consequences. 

If you wish to ensure that transactions carried out between related parties are properly secured and do not generate significant tax risks, it may be worth considering conducting a transfer pricing audit. 

More information about tax security can be found here → https://www.mddp.pl/tax-security/