What are the best practices for managing transfer pricing audits and disputes in Asia?

Transfer pricing, the process of setting prices for transactions between related entities, is a complex and challenging area of tax compliance and planning. In Asia, transfer pricing audits and disputes are becoming more frequent and aggressive, as tax authorities seek to align their rules with the global standards of the Base Erosion and Profit Shifting (BEPS) project. How can you manage your transfer pricing risks and resolve any issues effectively in this dynamic and diverse region? Here are some best practices to consider.

1 Know the local requirements

Each Asian country has its own transfer pricing regulations, documentation standards, and enforcement methods. You need to understand the specific rules and expectations of the jurisdictions where you operate, and comply with them accordingly. For example, some countries require annual transfer pricing filings, while others only request them upon audit. Some countries have specific methods or benchmarks for determining arm's length prices, while others allow more flexibility. Some countries have advance pricing agreements (APAs) or mutual agreement procedures (MAPs) to prevent or resolve disputes, while others do not. You should consult with local experts and keep up to date with any changes or developments in the transfer pricing landscape.

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Janmang Mehta

Experienced Transfer Pricing Professional at BDO UK
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I believe that the tax authorities are sometimes very particular and strict about their requirements, and they expect taxpayers to maintain documentary evidence of the Transfer pricing methodology being used. This is based on my experience assisting clients with TP matters involving India and Bangladesh. Because of this, it is crucial for the taxpayer's TP department or Tax department to be fully aware of the rules and regulations regulating TP audits and to adequately prepare for them. Although it's unlikely that any taxpayer's case will be selected for assessment, if it occurs, one should be prepared to work with the authorities by promptly supplying any required documentation.

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2 Prepare robust documentation

Documentation is the key to demonstrating the arm's length nature of your related-party transactions and supporting your transfer pricing positions. You should prepare comprehensive and consistent documentation that covers the functional, economic, and legal aspects of your transactions, and aligns with the OECD's three-tiered approach of master file, local file, and country-by-country report. You should also ensure that your documentation is tailored to the local requirements and expectations of each jurisdiction, and that it is ready to be submitted within the deadlines or upon request. You should review and update your documentation regularly to reflect any changes in your business operations or transfer pricing policies.

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3 Engage with tax authorities

Communication and cooperation with tax authorities are essential for managing transfer pricing audits and disputes in Asia. You should proactively engage with them to understand their concerns, explain your positions, and provide any additional information or clarifications they may need. You should also be respectful, courteous, and professional in your interactions, and avoid any confrontational or defensive attitudes. You should seek to resolve any issues at the earliest possible stage, and explore any available options for negotiation or settlement. You should also consider using APAs or MAPs, where applicable, to obtain certainty and avoid double taxation.

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4 Leverage technology and data

Technology and data can help you streamline your transfer pricing processes and enhance your audit readiness. You should use reliable and relevant data sources and tools to conduct your transfer pricing analysis, benchmarking, and reporting. You should also use technology to automate, standardize, and integrate your transfer pricing documentation and compliance activities. You should leverage data analytics and visualization to identify and monitor your transfer pricing risks and opportunities, and to support your decision making and planning. You should also ensure that your technology and data are secure, accurate, and compliant with the local regulations and standards.

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5 Seek external support

Managing transfer pricing audits and disputes in Asia can be challenging and time-consuming, especially if you have multiple or complex transactions across different jurisdictions. You may benefit from seeking external support from qualified and experienced transfer pricing professionals, who can provide you with technical advice, practical guidance, and strategic solutions. They can help you design and implement your transfer pricing policies, prepare and review your documentation, communicate and negotiate with tax authorities, and resolve any issues or controversies. They can also help you keep abreast of the latest developments and trends in the transfer pricing arena, and advise you on how to optimize your tax outcomes and mitigate your risks.

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