Transfer Pricing Audits: What should taxpayers expect?

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Transfer Pricing Audits

What should taxpayers expect?

The responsibility to provide accurate explanation and justification of related party policies and arrangements rests squarely on taxpayers and their business managers. This responsibility ultimately implies the duty tocooperate fully with FIRS. And if this responsibility is not adequately discharged to the satisfaction of FIRS, no taxpayer should blame FIRS where it resolves inconsistencies, ambiguities or paucity of information against them

It is a matter of when and not if, for a taxpayer engaged in related party transactions and which has submitted its transfer pricing (TP) returns to Federal Inland Revenue Service (FIRS), to receive either request for documentation as a prelude to a formal audit notification process or outright notification for a TP audit from FIRS.

Most companies that have 31 December year-ends have completed their second cycle of submission of TP returns to FIRS. They are now simply waiting for feedback from FIRS on those returns and quietly hoping that there will be no TP adjustments resulting in additional tax liability. According to Eduardo Baistrocchi, there are six broad stages that countries generally go through in the evolution of their TP Dispute resolution process. These are:

  • Stage 1 – the period when the tax jurisdictions had only formal companies' income tax laws without TP legislations and no TP disputes were initiated by the tax administrators
  • Stage 2 period when TP disputes started to arise between tax administrators and taxpayers bordering on the arm's length principle (ALP)
  • Stage 3 – period of enactment of formal TP legislations introducing the ALP into the local legislature
  • Stage 4 – period when TP disputes bordering on the ALP and TP regulations were not litigated but were resolved at the tax administration level
  • Stage 5(1) – pre mutual agreement procedures (MAPs) and advance pricing agreements (APAs) regime when TP disputes were resolved through litigations,
  • Stage 5(2) resolution of TP disputes in non-litigious administrative procedures through use of APAs and MAPs

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Transfer Pricing Audits: What should taxpayers expect?
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