Transfer Pricing Audits Are Inevitable.
Being Unprepared Is Optional.
When a tax authority initiates a transfer pricing audit, the first thing they scrutinize is not your comparable companies or intercompany agreements, it’s your story.
In a recent webinar, Exactera’s Michael Desimone walked through what companies often get wrong when preparing for transfer pricing audits, and revealed how to avoid common mistakes that can unravel your defense before the audit even begins.
Here are somekey takeaways from the session, now available on-demand.
Audit Defense Starts with Documentation, Not the Audit
Most companies treat their documentation as a compliance checkbox. But according to Desimone, that is a missed opportunity.
He encourages companies to think of their local file and master file as a narrative with clear context and a defined conclusion. If you don’t shape the story yourself, the auditor will do it for you.
“You’ve got one chance to tell your story before someone else rewrites it,” he says.
Mind the Gaps: Consistency Is Critical
Transfer pricing does not exist in isolation. Your filings, documentation, and public statements must align. O Auditors can use inconsistencies to challenge your position. Common disconnects flagged in the webinar include:
- SEC filings that conflict with transfer pricing narratives
- Mismatches between local and global functional analysis
- Inconsistent descriptions of the same activity
Even small calculation errors or misaligned assumptions—if found by the auditor instead of being voluntarily disclosed—can hurt your credibility. Desimone recommends addressing minor issues proactively to build trust.
Internal Alignment Matters More Than Ever
When tax, finance, R&D, and legal teams are not aligned, your documentation becomes vulnerable.
Inconsistent descriptions of the same activity across departments—for example, in an R&D claim, transfer pricing report, and cost-sharing agreements—create openings for audit scrutiny. The fix is simple: communicate internally and document consistently.
“If three departments tell three different stories, the auditor assumes all three are wrong.”
Don’t Rely on Boilerplate Analysis
Auditors are looking for substance. Generic functional analysis, outdated contracts, and recycled policy language are not enough. Your documentation should clearly answer:
- Who is doing what, for whom?
- What assets are being contributed?
- What risks are being assumed?
And if the same person is signing both sides of an intercompany agreement, or the signatories haven’t changed in a decade, it is time to review your process.
Benchmarks and Methods Are Only Part of the Story
Using the Comparable Profits Method (or Transactional Net Margin Method) is common, but not enough on its own. The most defensible documentation explains why the selected method was appropriate and why other options were not.
The same applies to your comp set. A set of 10 to 12 companies is generally strong. Too few makes the range fragile. Too many looks like you’re trying to dilute the outcome.
