In 2018, while the regularization of the national legislative framework for the documentation of intercompany transactions developed, were not yet evident the great importance of this newbuilding tax sector that within a decade was to be evolved to a primary importance audit field for the tax authorities worldwide.
The reconciliation between the international jurisprudence (non-binding proposals of the Organization for Economic Cooperation and Development-OECD, of the European TP forum, of the USA competent authority – IRS) and the national legislation, as formulated by all tax policies, has created a rigorous and often stifling field of control of intra-group transactions that can be described as one of the fairest and most representative systems of balancing competition and controlling corporate profitability in contemporary economy.
The development of a special audit team for reviewing transfer pricing documentation within the Audit Authority for Large Enterprises has highlighted the great importance that the local tax authorities attribute to the management of intra-group transactions. The department, consisting of specialized executives, suitably trained in theoretical (application of documentation methods) and practical level (database manipulation), is engaged in the audit of transfer pricing documentation of companies belonging to national or multinational enterprise groups and the similar drafting procedures.
After almost a decade of tax audits (challenges) in the field of documentation of intra-group transactions, it is now possible to safely encode the confidential knowledge from these controls, which can yield the profile and their goals.
The main purpose, as in the case of other tax audits, is to increase government revenues from inconsistencies in intra-group pricing (infringement of the arm’s length principle-ALP) while reviewing the broader accounting and tax consistency per case. Therefore, the documentation of intra-group transactions is the object to which the audit authorities aim to obtain a first representative impression for the situation of an enterprise and thus direct other relative controls.
Apart from its role as the “guardian” of the audit authorities, the evaluation of transfer pricing policies is faced as an independent tax subject, due to the frequent vagueness and ambiguity of provisions and procedures, mainly in the sampling of “comparable independent companies” and in the analysis of the financial data of the parties under examination and may lead to a significant amount of adjustments for tax purposes over which the audited entity should have develop and be able to present clearly relevant documentation.
For formalities reasons the consistent timing and content submission of the Summary Information Table is a focal point for avoiding targeting of the submitting entity by the audit authority. Equally important is the structure of the Local or Master file documentation, since special emphasis is given to the careful examination of both the functional and economic analysis of the group company and the intra-group transactions under consideration.
The presentation to the audit authorities of only the Master file documentation (just the Greek translation of mother’s Master file), of the Local file documentation without functional analysis or references to the conclusions of the economic analysis entails an increased risk of rejection, imputation of adjustments for tax purposes and carrying out further control across the range of business operations.
As far as the applied documentation methodology is concerned, if it is applied in accordance with national and OECD guidelines, it is rather safe in case of an audit the use of traditional methods of documentation (Comparable Uncontrolled Price Internal and External-CUP Intr./CUP Ext., Resale Price-RP and Cost Plus Method-CPM) while non-traditional methods, although more frequent in their application, due to the fact that it are not required the use of commercial data by company’s ERP systems, leave the gap for questioning by the audit authority because, as mentioned above, of the relative lack of a clear methodology on the sampling of “comparable independent companies” but also of the way of analyzing the cost data and the financial statements of the tested parties and of handling of extraordinary events (e.g. making a significant provision for doubtful receivables, which for tax purposes were added by the audited entity to the adjustments) which affect the relevant ratios in EBIT level and require special handling in the documentation.
In any case, the development of documentation methodology is a specialized task, a real challenge for modern business structures, to be carried out by qualified staff with an appropriate theoretical background and practical experience, while it is necessary to take preventive action on intra-group pricing rather than ex-post an effort to mask discrepancies and differences.
It is certain that the field of Transfer Pricing will continue to be at the heart of the audits by the local tax authorities as well as the strategic planning of those groups of companies aspiring to dominate the global economy and to be a reference point for their administrative and management practices that will give them a coveted competitive advantage.
Emmanouil Papaderos
Mazars Transfer Pricing
March 2019
Transfer Pricing & Tax Authorities