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Tax Authorities Gear Up for Transfer Pricing Examinations

Transfer pricing scrutiny is increasing—blame it on BEPS, country-specific requirements, COVID-19, or whomever you’d like, but the reality is, it’s happening. Taxpayers know it and so do tax authorities. In fact, while many tax authorities have put audits and examinations on hold as a relief measure due to the pandemic, some are gearing up once again—and the focus is, not surprisingly,  multinational companies’ transfer pricing documentation.

The pandemic isn’t even over and already the National Tax Agency of Japan is back in action when it comes to transfer pricing audits. The country had taken a hiatus due to COVID-19 but since October, tax officers have been reviewing related-party cross-border transactions. The tax authority has implemented a risk-based system, focusing on high-risk cases. Now, transfer pricing audits will be conducted as part of regular corporate income tax audits—ensuring that more taxpayers’ transfer pricing is reviewed.

Her Majesty Revenue & Customs (HMRC) also announced that its transfer pricing, pandemic-induced audit hiatus is over. In fact, in September HMRC went so far as to send letters to multinational companies questioning the transfer pricing practices, urging them to submit information to the diversion compliance facility.

Thailand’s Ministry of Finance is gearing up for transfer pricing audits, too. A new ministerial regulation set the procedure Thai tax officers must follow in analyzing and adjusting the pricing of related-party transactions. The regulation asks Thai tax officers to first compare taxpayers’ related-party transactions to similar transactions they had made with third-party companies. Of course, internal comparables aren’t always available and in those cases, the new regulation stipulates that tax officers should compare transactions to those between independent third parties.

The new guidance is a tool for Thai tax officers, but it’s also a consideration for Thai taxpayers: If it’s a priority for Thai tax authorities to analyze documentation using first internal comparables, then external ones, then Thai taxpayers should follow suit. Another eye-opener for Thai taxpayers: If Thai tax officers are putting official procedures in place for transfer pricing audits—then what do you think is coming your way?