How to leverage financial audits to enhance transfer pricing compliance and risk management?

Transactions with related parties can pose significant tax risks. Many taxpayers only identify transfer pricing (TP) issues when preparing documentation and submitting the Transfer Pricing Report (TPR), at which point their ability to implement necessary corrections is limited.

A financial audit presents an excellent opportunity to proactively identify risks related to intra-group transactions. As part of the audit process, companies already review their financial arrangements in response to auditors’ queries—this review can be extended to include a comprehensive transfer pricing audit. This approach enables businesses to manage TP risks effectively, avoiding subsequent adjustments and potential penalties.

Why use the financial audit period for a comprehensive transfer pricing review?

The final deadline for preparing TP documentation and submitting the TPR falls after the closing of financial statements and the submission of the CIT-8 tax return. In practice, this means many taxpayers only begin addressing transfer pricing matters in the second half of the year. Identifying irregularities at this stage may hinder effective risk management.

This timing is particularly critical because transfer pricing risks extend beyond the company itself—they may also affect key financial decision-makers, including board members, finance directors, and chief accountants.

What risks can be identified during a financial audit?

Depending on the group’s structure and approach to transfer pricing management, various issues may arise during a TP audit. It is essential to assess the overall compliance of intra-group transactions with applicable transfer pricing regulations.

Below are some common risks that can be identified—and proactively managed:

1. Intangible Services – Risk of Cost Deductibility Challenges

Insufficient documentation proving that services were actually performed and benefited the company may result in:

Tax authorities questioning the deductibility of these expenses for corporate income tax purposes.

2. Unusual Transactions – Risk of Tax and Financial Penalties

Certain transactions, due to their atypical nature, may be overlooked in the TPR report, exposing board members to financial and tax penalties. This is particularly relevant for:

Transactions with entities located in tax havens

Transactions made without remuneration (e.g. guarantees or sureties), which could be reclassified as non-remunerated benefits

Capital transactions

Rebilling of costs (recharges)

Business restructurings

3. Financial Transactions – Risk of Non-Market Conditions

Intra-group financing is one of the most scrutinized areas in transfer pricing audits. Key risks include:

Recognition of taxable income from non-remunerated benefits in cases of interest-free loans

Risk of reclassification of cash pooling arrangements as loans

Potential adjustments to the timing of income or expense recognition based on the “arm’s length principle”

4. Transfer Pricing Adjustments – Risk of Regulatory Scrutiny

Errors in TP adjustments may lead to:

Non-recognition of an adjustment as a valid TP correction (the correct classification significantly impacts tax treatment and TPR reporting obligations)

Increased scrutiny from tax authorities, prompting a review of whether initial pricing was at arm’s length

5.Transfer Pricing Model – Risk of Obsolescence

A well-defined transfer pricing model is crucial for ensuring compliance in transactions with related parties.

Key risks may arise from:

Failure to update the model to reflect changes in the company’s operating structure, potentially affecting the arm’s length nature of transactions

Non-compliance with local TP regulations across all jurisdictions involved

Conclusion

The financial audit period provides an optimal opportunity to identify and mitigate transfer pricing risks before they escalate. By conducting a parallel transfer pricing review alongside the financial audit, companies can avoid costly adjustments and penalties while streamlining the subsequent preparation of TP documentation and TPR reporting.

This timing is also advantageous as obtaining necessary calculations and documentation from the corporate group may be easier, significantly facilitating compliance with TP reporting obligations.

Do you value compliance and risk management?

Are you aware that responsibility for transfer pricing extends beyond the board of directors? Do you oversee financial matters within your company?

Contact our team today. Benefit from our expertise and 20 years of experience. We will help you identify critical transfer pricing risks—both for your company and for you personally—and provide effective, compliant solutions to manage them.

#MORE about Transfer Pricing >> https://www.mddp.pl/transfer-pricing/