Transfer pricing tax audits are essential to ensure that companies comply with tax regulations in their transactions with related entities. These regulations require that intra-group transactions – such as the sale and purchase of goods, provision of services or transfer of intangible assets – are valued as if they were between independent parties, following the arm’s length principle.
It is a common misconception that these regulations only affect large multinationals. In reality, any company that carries out transactions with related entities may be subject to a tax audit. It is therefore essential to be prepared to avoid penalties and tax adjustments.
What is reviewed in a transfer pricing inspection?
Transfer pricing inspections seek to verify that transactions between related companies comply with Spanish regulations and the OECD Guidelines. Some key points that are usually reviewed include:
- Valuation of intra-group transactions:
- Purchase and sale of goods.
- Provision of services.
- Assignment or use of intangible assets (patents, trademarks, etc.).
- Supporting documentation: The legislation requires companies to maintain a transfer pricing dossier, detailing the policy applied to determine prices. This document must demonstrate that the transactions comply with the arm’s length principle.
- Tax impact: A review of whether intra-group transactions have had an impact on the company’s tax base, especially in cases that may involve tax base erosion or profit shifting.
Key steps to prepare your company for a tax audit
1. Review transfer pricing policy
Analyse how prices have been determined in transactions between related entities. It is important to ensure that these are in line with market conditions.
Tip: If you do not have a recent study, it is advisable to update it with the help of experts to avoid inconsistencies in case of a review.
2. Maintain robust and up-to-date documentation
Regulations require companies with intra-group transactions to have a transfer pricing file. This document should include
- Description of the transactions carried out.
- Methodology used to determine prices.
- Analysis of comparables with similar transactions in the market.
Incomplete or outdated documentation may be grounds for a sanction.
3. Assess the most common intra-group transactions
Transactions that tend to raise the most concerns in an inspection include:
- Intra-group services: Ensure that services provided between related companies are real and add value.
- Financial transactions: Such as loans between group companies, where the interest charged must be justified.
- Management of intangible assets: Particularly in the case of assignments of trademarks, patents or know-how.
4. Simulate a tax audit
Preparing your team for a possible tax audit can be key. Simulating this process helps to identify possible deficiencies in documentation and improves your ability to respond to the requirements of the tax authorities.
Recommendation: Be clear about the roles and responsibilities of the team in charge of managing the inspections.
5. Get expert advice
The transfer pricing regulatory framework can be complex and requires expertise to ensure compliance. Having specialist advice helps to anticipate potential problems and respond appropriately to an inspection.
Consequences of not being transfer pricing ready
A tax audit can result in:
- Tax adjustments: Modification of the tax base and additional taxes.
- Financial penalties: In cases of non-compliance, fines can be substantial.
- Deterioration of the company’s image: Especially if the case goes public.
How can we help you in a tax inspection?
At Gutiérrez Pujadas & Partners, we understand that each company has specific needs. That is why we offer customised solutions that are tailored to the structure and operations of each client. We keep up to date with changes in tax regulations, which allows us to offer an up-to-date and effective service. Whether your company needs a review of its current policies or assistance in creating new documentation, we are ready to help.
Do you need advice on a transfer pricing tax audit?
Our team of international tax experts at Gutiérrez Pujadas & Partners has extensive experience in dealing with transfer pricing in different jurisdictions. We work closely with our clients to ensure that their operations comply with local and international tax regulations, minimising penalty risks and optimising their tax structure.
Being ready for a transfer pricing inspection not only avoids legal problems, but also provides transparency and confidence in the management of your company. Proper documentation and continuous analysis of intra-group transactions are the best tools to ensure compliance and protect your company’s interests.
FAQ about Tax Inspections and Transfer Pricing
What is a transfer pricing tax audit?
A transfer pricing tax audit is a review carried out by the Tax Agency to verify that transactions between related companies comply with the arm’s length principle. This principle ensures that the prices agreed in such transactions are in line with market conditions. Inspections may include requests for documentation, analysis of valuation methods and tax adjustments if irregularities are detected.
When can a company be subject to a transfer pricing tax audit?
Any company that engages in transactions with related entities may be subject to a tax audit. This includes companies operating domestically or internationally. The main factors that trigger a review are inconsistencies in documentation, significant intra-group transactions or high-risk sectors for the tax authorities.
What documentation is required for a transfer pricing tax audit?
During a transfer pricing tax audit, a dossier is required that includes details of the intra-group transactions, the methods applied to determine the prices and an analysis of comparables. In Spain, this documentation must comply with the Spanish Corporate Tax Regulations and OECD guidelines.
What happens if my company does not have transfer pricing documentation in order during a tax audit?
If the documentation does not comply with the legal requirements during a tax inspection, the Tax Agency may make adjustments to the company’s tax base. In addition, financial penalties may be imposed for non-compliance, which can generate significant costs and damage the company’s reputation.
How can a company prepare for a transfer pricing tax audit?
To prepare, companies should maintain up-to-date documentation, analyse intra-group transactions and ensure that they are in line with the arm’s length principle. It is also useful to carry out simulated tax audits and to be supported by expert transfer pricing advisors.
What is the arm’s length principle in transfer pricing and why is it important in a tax audit?
The arm’s length principle states that the prices agreed in transactions between related companies must be equivalent to those that would be applied by independent parties. This principle is essential in a tax audit, as it is used by the tax authorities to assess whether transactions have affected the tax base unduly.
How long does a transfer pricing tax audit last?
The duration of a transfer pricing tax audit varies depending on the complexity of the transactions reviewed and the quality of the documentation submitted. In general, the process can last for months and include multiple requests for information from the tax authorities.
What kind of penalties can be imposed following a transfer pricing tax audit?
Penalties may include financial penalties proportional to the tax adjustment made, which may exceed 15% of the adjusted amount. In addition, missing or incomplete documentation may lead to additional fines, according to article 206 bis of the General Tax Law.
Which transactions are most susceptible to review in a transfer pricing tax audit?
The most commonly reviewed transactions include the transfer of intangible assets, intra-group loans, sale and purchase of goods and intra-group services. These transactions often involve a high degree of subjectivity in valuation, which makes them a focus of attention during a tax audit.
How can a specialised advisor assist in a transfer pricing tax audit?
A transfer pricing advisor can help prepare the required documentation, analyse the transactions under review and defend the company’s interests before the tax authorities. Their knowledge of the regulatory framework is key to minimising risk and ensuring compliance.