How to Navigate a Transfer Pricing Audit

Transfer pricing audits are becoming more common, as tax authorities around the world tighten regulations on multinational businesses.

If your company operates across borders, knowing the transfer pricing examination process and preparing for potential audits will help you prepare for them. After all, transfer pricing directly affects how much tax a company pays in each country in which it operates.

In this article, we’ll explore how audits work, who is most at risk, and how to be audit-ready with best practices. We'll also explore ways in which Wise Business may help you manage cross-border business finances.

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Table of contents
Tax and transfer pricing audit applicability What types of companies are most likely to be audited When is a company susceptible to being audited? How long does the process typically take What are the key steps in the transfer pricing examination process Best practices for navigating a transfer pricing audit Final thoughts Save Time and Money On Overseas Payments With Wise Business

Tax and transfer pricing audit applicability

With tax authorities keeping a closer eye on multinational companies, you’ll want to know when your business might get audited.

What types of companies are most likely to be audited

Transfer pricing audits are most commonly directed at multinational enterprises (MNEs) that conduct frequent intercompany transactions, especially those involving intangible assets, complex financial structures, or operations in low-tax jurisdictions.¹

Tax authorities pay close attention to industries where the pricing of goods, services, or intellectual property is difficult to benchmark. According to the United Nations Transfer Pricing Manual, companies making transactions involving the transfer of intangible property, such as industries like technology and finance, are particularly more likely to face scrutiny.

However, any company, regardless of size, industry or location, can be subject to a transfer pricing audit. While large MNEs may face more frequent audits, smaller businesses aren’t immune. A lack of proper documentation or abnormal transactions, for example, can put any business on the radar. That’s why having solid and trustworthy transfer pricing policies is so important.

When is a company susceptible to being audited?

Your company may be selected for a transfer pricing audit under several conditions:

• Discrepancies in your local and international filings
• Sudden or unexplained drops in taxable profit
• Unusually high payments to affiliated companies in tax havens
• Incomplete or inconsistent transfer pricing documentation¹

Many tax authorities now use risk assessment tools and data analytics to identify audit candidates. Irregular margins or transactions lacking commercial rationale can trigger red flags.

How long does the process typically take

A transfer pricing audit can vary widely in duration depending on jurisdiction and complexity, but it often lasts anywhere from 6 months to several years, depending on the size of the case. The IRS Transfer Pricing Examination Process (TPEP) recommends a structured, phased approach for cases, including risk assessment, issue development, and resolution.²

However, timelines may vary based on the quality of your documentation and your responsiveness to tax authorities. Companies that proactively cooperate and provide clear, well-organized information tend to experience smoother audits. On the other hand, missing or delayed documents can lead to extended investigation, higher scrutiny, and potential penalties.

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What are the key steps in the transfer pricing examination process

While each jurisdiction may have its own procedures, the transfer pricing examination process usually includes the following phases.

1. Risk assessment and case selection

Tax authorities use internal data and analytics to identify cases with potential transfer pricing issues.

2. Information request (IDR or equivalent)

Once selected, companies receive a formal request for documentation supporting their transfer pricing arrangements. These often require local files, master files, and country-by-country reports.

3. Functional and economic analysis

Tax auditors evaluate the functions performed, risks assumed, and assets used by each party in the intercompany transaction. They also compare your pricing methods against those used by independent companies.

4. Benchmarking review

Authorities review the comparables you’ve used and may perform their own search using different data sets.

5. Adjustment proposal

If the auditor disagrees with your transfer prices, they’ll propose adjustments and potentially assess penalties.

6. Discussion and resolution

This phase includes negotiations, presentation of additional documentation, and possible escalation to tax courts or mutual agreement procedures (MAP).

The audit process often demands ongoing engagement between taxpayers and the audit team, and success depends on the quality and consistency of your documentation.

Best practices for navigating a transfer pricing audit

The best way to handle a transfer pricing audit is to prepare long before one begins. Here are some best practices to follow.

Prioritize audit readiness

Being audit-ready means having thorough, up-to-date documentation that justifies your transfer pricing policies. Tax authorities are increasingly looking for evidence that companies have proactively assessed and documented their policies and not just responded after the fact.

Key elements of being audit-ready include:

• A well-prepared transfer pricing policy document
• Local file and master file aligned with OECD standards
• Access to benchmarking studies and functional analyses
• Timely responses to information requests³

Know the transfer price audit triggers

Understanding what prompts a transfer pricing audit can help you avoid unnecessary attention. Triggers include:¹

• Reporting losses year after year
• Payments for services or intangible goods without proper substantiation
• High intercompany royalty or interest payments
• Drastic changes in profitability across group entities

Monitor your intercompany pricing closely and compare against market data regularly to avoid audit triggers.

Be transparent and cooperative

Transparency builds trust. If audited, provide clear explanations of your pricing methods and documentation. Being cooperative or withholding documents can lead to negative inferences and penalties.

Review and test your transfer pricing model periodically

A method that worked two years ago may not be appropriate today. Markets change, regulations evolve, and business models shift. Conduct periodic reviews of your transfer pricing framework to ensure ongoing compliance.

Engage experts early

If you suspect an audit is coming, get professional support right away. Local advisors can help you understand country-specific audit risks and regulations. They can also help craft a transfer pricing audit report if required, to explain how your policies align with local laws.

Document your business rationale

Sometimes your intercompany pricing won’t perfectly match external benchmarks. If you can explain why, then it may be acceptable. But for further preventative measures, always include commercial justifications, such as specific cost structures, risk-sharing agreements, or strategic business decisions.

Track global developments

Stay updated on international tax trends, like the OECD’s BEPS (Base Erosion and Profit Shifting) initiative. Countries are increasingly sharing information and aligning transfer pricing standards, knowing that new information can be a preventative measure.

Final thoughts

A transfer pricing audit doesn’t have to be a nightmare. With the right planning and documentation, you can minimize risk, stay compliant, and confidently manage your global operations. Knowing the ins and outs of the transfer pricing examination process and being prepared are your best tools to navigate any audit.

Incorporating these best practices, whether it’s audit readiness or knowing your transfer pricing audit applicability, will help ensure that your company’s financial strategy remains transparent, fair, and fully defensible.

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Sources:

1. Transfer pricing audit triggers and how to avoid them | Commenda
2. IRS publishes new guide on transfer pricing examinations | EY
3. Transfer Pricing Documentation | Valentiam Group