What are the transfer pricing implications of adjustments and penalties?

One more logical yet complex sort of adjustment is where secondary adjustments are reflected in Financial Statements in true sense. Assume, a royalty charged to an offshore subsidiary was not an Arms length and made good by Tax authorities by adding a margin of 10 percent. While the income goes up 10 % for IP provided, the recipient takes an additional 10% cost hit in corresponding adjustment. The secondary adjustment then follows where the IP provider would book an additional receivable in books followed by recipient booking a Payable. In due course it would be expected to be settled. Add, indirect Tax angle to this, if VAT applies on Royalty that too would have to charged if law warrants that. (Challenge, assessments are post facto)

For example we can mention about the dispute involved the transfer pricing arrangements between GSK and its US subsidiary for the sale of several drugs, including Zantac, a popular anti-ulcer drug. The IRS claimed that GSK had underpriced the drugs sold to its US subsidiary, and thus shifted profits from the US to the UK, where the tax rate was lower. The IRS also claimed that GSK had overpaid royalties to its UK parent for the use of intangible assets, such as patents and trademarks, related to the drugs. So in both way tax adjustments incurred.

Me parece que a menção a “outras partes” como autoras de ajustes e penalidades fica um tanto quanto genérico. Além disso, a própria menção à “ajustes” e “penalidades” deixa o texto pouco assertivo com relação ao tema. Esses ajustes são requalificações para fins fiscais? As penalidades são multas ou tributos? Tributos não são penalidades, então, seria um erro o uso desse termo.

Adjustments and penalties occur in transfer pricing when there are errors or omissions in the tax reporting or documentation of a business or an entity. These errors or omissions may result in an understatement or overstatement of the tax liability or refund, and may trigger additional taxes, interest, or penalties imposed by the tax authorities. Adjustments and penalties may also arise from changes in the tax laws or regulations, or from audits or examinations by the authorities.

Adjustments and penalties in transfer pricing relate to changes made by tax authorities to the prices at which intra-company transactions are valued. These adjustments can lead to increased tax liabilities and potential penalties for non-compliance. They can significantly impact a company's financials and reputation. Proper documentation and adherence to arm's length pricing principles are essential to mitigate transfer pricing risks and associated implications.

The interplay of transfer pricing (TP) and customs duty is interesting. While TP authorities prefer lesser costs (so profits and hence direct taxes are higher), customs authorities prefer higher values for imports (linked to customs duties paid). Both authorities kind of agree to the arm’s length price or market price as an agreeable solution. The trouble is that this is subjective. Therefore, if there is a TP adjustments made in order to meet the arm’s length price, can the customs duties be revisited too? Several judgments especially in the European context have held that there is no need to revisit customs duties when the pricing was based on market prices at the time of import.

When TP adjustments are made using profit based methods such as TNMM, typically, there is aggregation of transactions. For e.g., an adjustment for margins earned in distribution segment of a company means that all purchases from related parties across countries are being subject to it. In MAPs, any jurisdiction would be interested in only their share of the adjustment (double taxation). How should the adjustment be apportioned? A simple and typically applied approach is to apportion the adjustment based on value of controlled transactions. Do consider that MAP is a negotiation and also that each competent authority may have its own positions on how to approach an issue. Nevertheless, they may also be open to other logical alternatives.