Be your own tax inspector!...

Try to look at your business through the eyes of a tax inspector performing a risk assessment based on some warning signs (risk factors):

  • everything out character, based on the performance of the company / industry. (e.g. losses for several consecutive years / profits fluctuation / disconnections between financial results and paid taxes);
  • transactions with affiliated parties resident / non-resident; transactions with companies based in tax havens;
  • paying significant amounts for service contracts and licensing contracts;
  • remuneration / benefits for employees;
  • special events: divestments, acquisitions, mergers, change of business model, outsourcing of departments etc.

The moment you managed to “gather” more than one such risk factor, and transactions with affiliated parties are not missing, it is time to start preparing for the impact of the transfer pricing audit (see here how transfer pricing has become a hot tax issue).

... tips for building good tax protection

  • try to have consistent answers regarding the economic substance of transactions with related parties (this shows that the expense make sense and therefore are deductible);
  • be very careful when considering the contractual provisions that establish the nature of payments (based on the nature of products / services received or royalties, know-how transfer);
  • review all the service contracts in order to avoid permanent establishment risk;
  • prepare a comparability study so you can prove that the prices of these transactions were within arm’s length range (as if the transaction were conducted between independent parties);
  • if due to budgetary constraints you postpone making the transfer pricing documentation file (otherwise, an absolutely necessary element in case of a tax audit) at least prepare a transfer pricing policy! This will give you the safety margin for future intra-group transactions.

…but preparing for a tax audit is an ongoing process ...