B4.171 Key issues in identifying transfer pricing risk
The purpose of this commentary is to provide guidance to non transfer pricing specialists on a structured approach for the identification of transfer pricing risk. The issues and the methodology focus on risk assessments for trading transactions. Different approaches may be necessary for financing and thin capitalisation risk, although some of the same issues will be relevant. This provisions are applicable to any occasions when transfer pricing risk needs to be identified. These include as part of an audit of tax provisions, for tax due diligence and for initial advice to clients on transfer pricing issues.
When undertaking a risk review for audit purposes, the audit team should be well placed to provide an initial description of the business operations, but it may be sensible to confirm that their initial planning and documented understanding of the business covers the relevant details.
The comments are based on the UK approach to transfer pricing and tax administration but the transfer pricing principles also apply to a global review. Not all circumstances and all nuances of an evaluation of risk are covered and where initial results indicate a need, further specialist guidance and advice should be sought.
The following key issues need to be addressed when undertaking a transfer pricing review:
• facts and circumstances
• transfer pricing methods adopted
• persistent losses
• entities, netting and set-offs
• contractual documentation
Materiality in a transfer pricing