Tax audits can be difficult enough without facing a situation where the tax team that was in place at the time the tax returns were prepared have since moved on.
We had a client reach out to us this week who is in the beginning stages of a tax audit of the group’s Italian operations. The audit covers years that reach back to 2014 – five years ago. Luckily, there are several factors that place the company in a position of strength for the audit when discussing any transfer pricing matters:
- Key management retained – The local CFO was hired back in FY 2014 and at that time, rolled up his sleeves and dived into the details of the transfer pricing policies, processes and documentation – so he has a good understanding of the issues relevant to the audit period.
- External collaboration – In addition, as Aspect Advisory collaborated with the CFO to prepare transfer pricing documentation for that year, the company also has the benefit of our knowledge to draw on, particularly related to the detailed financial analysis.
- Documentation and support notes – And of course having prepared transfer pricing documentation for the three Italian business units, the company has placed itself in a good position for discussions – the CFO and his team have all the information in the transfer pricing reports and associated internal reference notes to quickly remind themselves of the issues and decisions made when developing the transfer pricing policy.
Tax personnel regularly move on to follow other career opportunities
It is not always the case that companies have the benefit of a long-standing tax team with deep knowledge of the group’s transfer pricing issues over many years. Often, a tax audit needs to be addressed by a team (or at least one or two key members) relatively new to the organization, who are themselves still navigating tax challenges for the group.
In recent years, we have seen tax and transfer pricing talent make career moves more frequently – often leaving roles within companies after just a few years.
And then comes the tax audit!
Transfer pricing documentation and support notes can provide robust information to navigate issues under audit conditions
With this in mind, one of the best ways to mitigate risks associated with knowledge leaving an organization when key tax personnel move on, is to ensure complete and robust transfer pricing documentation is prepared, or updated, each fiscal year.
While final transfer pricing reports should be stand-alone documents ready for audit review, we recommend internal notes be available to support information provided in the reports – such as the precise source of financial data, the basis of strategy decisions taken around benchmarking analyses, and notes of key discussions held with personnel related to key functional and risk attributes of the transfer pricing analysis.
Information on file internally to support transfer pricing reports should be prepared on the assumption that the tax team actually facing questions around transfer pricing issues under audit five years from now, are not the same team currently addressing and documenting those issues. Such documentation will help the new tax team understand and navigate the issues with more confidence – and greatly increase the likelihood of a smoother and efficient audit.