Transfer Pricing Risk Management - Our Approach
In order to ensure that your international related party transactions continue to be undertaken in the most appropriate manner, Crowe Horwath adopts the following five-phase process to review your business circumstances and to proactively manage any changes in your transactions or business:
- Phase 1: Review your business circumstances
- Phase 2: Assess, quantify and evaluate the risks or opportunities of the current transfer pricing model
- Phase 3: Redesign or amend the transfer pricing model (if required)
- Phase 4: Document your risk assessment, transfer pricing model and analysis
- Phase 5: Monitor the transfer pricing model for ongoing risks and opportunities.
Phase 1: Review
In phase one we review your:
- Industry, circumstances and commercial objectives
- Key functions and activities performed
- Key assets (both tangible and intangible)
- Key risks associated with your activities
- Current value chain and the plans for it in the future.
Without a full understanding of these aspects of your business, it is difficult to appreciate your potential transfer pricing risks and opportunities.
Phase 2: Assess
Once we understand the design of your existing transfer pricing model, we assess whether:
- The model is consistent with your functions, assets and risks
- The outcomes of the model are supported by external benchmarking
- The model, methodologies and outcomes are appropriately reflected in the inter-company agreements
- The model is robust, supportable and sustainable
- Circumstances require an advance pricing agreement (APA)
- The model and the methodologies applied are consistent with the incentive and performance measures of the business.
Any potential tax exposures or opportunities identified may indicate that additional work is required. This may result in an amended transfer pricing model.
Phase 3: Redesign
Once we have assessed your model, we redesign it to:
- Mitigate potential risk
- Maximise potential opportunities.
The redesigned transfer pricing model must address any risk or opportunity identified in Phase Two. It should minimise your tax and financial reporting risks.
Phase 4: Document
When we are confident that the transfer pricing model, methodologies and outcomes are appropriate, we ensure that all of the relevant supporting documentation is prepared. This documentation should:
- Support your tax filing position
- Be specific to your facts and circumstances
- Include appropriate executed legal agreements.
If your risk assessment and transfer pricing analysis is not documented, you may find it difficult to evidence your compliance with the transfer pricing rules of the relevant tax authorities.
Phase 5: Monitor
Once implemented and documented, it is important to actively monitor your transfer pricing model for ongoing application and appropriateness. We recommend appropriate procedures to:
- Ensure risks are proactively managed and updated
- Identify key transactional and financial information for monitoring and reporting purposes
- Identify and document non-routine transactions or arrangements
- Update your documentation in an efficient and cost-effective manner.
A failure to implement appropriate review procedures can result in transfer pricing exposures in relation to new or extraordinary transactions. A failure to maintain your transfer pricing policies and practices can undermine their credibility in the eyes of the relevant tax authorities, thereby inherently creating risk.
Applying this five-phase process will help ensure that your international related party transactions are undertaken in the most appropriate and tax efficient manner. Any potential exposures that exist in your transfer pricing model can be identified and addressed in a timely and cost-effective manner.