In many groups, transfer pricing is considered a well-understood topic.
Documentation is in place, benchmark studies have been carried out, and margins are within the specified ranges. The system is considered secure.
However, in tax audit practice, transfer pricing remains one of the main areas of discussion and adjustment.
Adjustments are rarely due to methodological errors or clearly excessive positioning, but more often to insufficiently justified choices or policies that have not been reviewed in light of changes in the group's activities. Outdated documentation, benchmarks automatically rolled over without reviewing comparables, changes in functions or risks not reflected in transfer pricing policy: these factors become central when the company has to explain and defend its positions.
For both tax and finance departments, the challenge is therefore not limited to producing documentation that complies with formal requirements, but also to demonstrating the consistency and relevance of the choices made over time.
This article identifies the main areas of transfer pricing risk that are frequently underestimated and proposes concrete ways to secure them without unnecessarily complicating existing mechanisms.
I. Transfer pricing risk areas that are most often underestimated
1. Benchmarks that appear compliant, but become weaker over time
In practice, particularly in France, comparability studies are generally repeated every three years. Over the three-year period, financial data is updated without reworking the panel, which is an accepted, pragmatic, and economically rational practice.
This approach is not problematic in itself. However, the risk arises when, in the intervening years, the panel is renewed without paying particular attention to changes in the selected comparables. A comparable may have been relevant when it was initially selected, but may gradually lose its comparability due to changes in its functions, assets, or risks. The addition of central functions, a move upmarket, or a more complex business model can thus call into question the relevance of the comparable, without this being immediately apparent from the figures alone.
Added to this is the sometimes mechanical application of certain search or exclusion criteria. The automatic exclusion of loss-making companies, the rigid application of geographical criteria, or the use of automatically applied ratios (e.g., the requirement for a minimum asset ratio for industrial activities) can lead to economically questionable results when they are not adapted to the transaction being tested or the industry concerned.
In this context, the risk is not so much linked to the existence of the benchmark as to the inadequacy of the economic reasoning behind it. In its audits, the administration is increasingly focusing on the dynamics of comparables and the relevance of the criteria used.
2. Positioning within the selected range without explicit economic justification
The fact that a profitability indicator falls within the interquartile range is still frequently perceived as sufficient protection.
In practice, the positioning chosen—midpoint, lower or upper end of the range—is often based on customary practices or opportunistic decisions, without a sufficiently explicit link to the functions performed, the risks actually assumed, or the specific economic contribution of the entity being tested. However, deviating from the median is not in itself questionable, but requires demonstrating why a more central point would not accurately reflect the economic reality of the transaction.
This risk is heightened when the pool of comparables is not very robust. The removal of one or two comparables may then be enough to push the margin outside the range, providing the administration with particularly favorable grounds for proposing an adjustment, most often to the median.
In this context, the administration no longer limits itself to noting that the margin is "within the range," but seeks to understand the logic behind the chosen positioning.
3. A transfer pricing policy that is disconnected from the group's operational reality
Another major risk area lies in the discrepancy between transfer pricing policy and the actual functioning of the group. This discrepancy may arise from the outset, when the functional analysis is based primarily on discussions with the finance teams, without in-depth interviews with key operational staff.
In this case, the functions, risks, and responsibilities are described in generic terms, without reflecting actual decision-making processes or the reality of value creation. The transfer pricing policy may then appear consistent on paper, but prove fragile when subjected to scrutiny.
This risk also arises over time when organizational changes within the group—reorganizations, changes in scope, shifts in value chains—are not incorporated into the functional analysis. A policy that is not regularly reviewed quickly becomes disconnected from reality.
During audits, this discrepancy is often highlighted by comparing the documentary evidence with discussions with operational teams. The administration does not necessarily question the method, but rather the overall economic consistency.
4. The proliferation of intra-group flows that are not very visible and insufficiently regulated
While flows involving the group's headquarters or central entities are generally closely monitored, many groups are exposed due to more discreet flows between operating subsidiaries, outside the usual approval channels.
This may include, for example, intra-group loans without remuneration or with insufficiently documented terms, services invoiced without a margin or on poorly substantiated flat-rate bases, or one-off re-invoicing implemented locally without an arm's length analysis.
Taken individually, these flows may present limited financial challenges. Taken as a whole, however, they significantly increase the group's exposure and, above all, undermine the overall credibility of the transfer pricing policy.
5. Failure to anticipate the control phase and time management
Finally, an often underestimated risk is the failure to anticipate the audit phase and manage the resulting time constraints. When the audit begins, the deadlines imposed by the administration are short and teams must be mobilized immediately.
Without preparatory work, gathering contractual, factual, and economic information becomes complex. Structural decisions—particularly in the case of reorganization—may have been made several years earlier, sometimes by people who are no longer in their positions, without their economic rationale having been formalized.
In this context, responses provided in a hurry are often incomplete or imprecise, which automatically increases the likelihood of an upgrade. The defense capability is therefore built well before the audit begins.
II. How to secure transfer pricing risk areas without complicating existing policy
1. Define robust search criteria and ensure a qualitative review of the panel over time.
Security begins with the construction of the initial benchmark. The search and exclusion criteria selected must be designed not only for the year in which the study is conducted, but also with a view to their ability to remain justifiable over time. They must also be tailored to the entity being tested and the transaction being analyzed, and not applied automatically or in a standardized manner without prior economic consideration.
In the intervening years, the objective is not to systematically redo the benchmark, but to conduct a qualitative review of the panel of comparables to ensure that their comparability remains relevant. This review, limited to the existing panel, is not time-consuming and demonstrates that the renewal of the benchmark is based on economic reasoning that remains valid, while remaining compatible with pragmatic management of the three-year cycle.
2. Frame the positioning in the interval with explicit economic reasoning.
In the absence of specific information, a prudent approach may be to use the median of the interquartile range. However, this position is not automatic and must be assessed in light of the specific characteristics of the transaction and the entity being tested.
When the group chooses to deviate from this, it is essential to formalize the economic reasoning behind this position, in relation to the functions performed, the risks assumed, and the actual contribution of the entity. This formalization helps to secure the choice made and demonstrate its consistency.
3. Develop and regularly review the functional analysis, in conjunction with operational staff.
As with benchmarks, particular attention must be paid to the initial phase of functional analysis. This must include interviews with key business stakeholders and not be limited to questioning the finance teams alone.
This analysis must then be reviewed regularly by the transfer pricing and tax teams, as well as with the relevant operational staff, in order to avoid repeating the same biases over time. Above all, these updates must lead, where necessary, to effective adjustments to the transfer pricing policy.
4. Map intra-group flows and disseminate appropriate guidelines
Pragmatic security requires mapping intra-group flows and improving the flow of information to central teams. Informing these teams of the existence of flows allows them to assess their nature and sensitivity, without systematically centralizing their management.
Once the mapping has been established, it becomes possible to identify the most sensitive flows, for which greater involvement is justified, and to limit intervention to simpler flows by issuing general guidelines. An educational approach, via clear guidelines, may be sufficient to significantly reduce the risks for these standardized flows.
5. Anticipate the control phase and manage time constraints
Finally, securing transfer pricing requires anticipating the audit phase and the time constraints it entails. Formalizing structural decisions in advance, retaining key information that motivated certain decisions, and identifying key contacts will enable you to respond more accurately and consistently to requests from the authorities.
This anticipation significantly reduces the risk that economically defensible plans will be called into question due to insufficient information within tight deadlines.
Conclusion
Transfer pricing risk areas are not usually due to excessive schemes or obvious errors. They result from common practices implemented for legitimate reasons of cost, time, or organization, but which become fragile when they are not sufficiently questioned or documented over time.
For tax and finance departments, the challenge is therefore not to complicate existing systems, but to ensure that structural choices—methods, comparables, positioning, intra-group flows—are based on clear economic reasoning that is consistent with the group's operational reality and defensible over time in the event of an audit.
A targeted approach, based on anticipation and a detailed understanding of sensitive areas, significantly reduces exposure to adjustments, while remaining compatible with companies' operational constraints.
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