Transfer Pricing Audits | Reduce Risks

Understanding Common Triggers Such As Profit Shifts and Non-Compliance

|  Scrutiny on Profitability and High-Value Transactions

The landscape of transfer pricing audits (TP Audits) across Southeast Asia, particularly in fast-developing economies like Malaysia and Vietnam, has intensified considerably, driven by governments’ increasing focus on domestic revenue mobilisation and the implementation of OECD’s Base Erosion and Profit Shifting (BEPS) actions. Tax authorities, such as Malaysia’s Inland Revenue Board (LHDN) and Vietnam’s General Department of Taxation (GDT), are demonstrating heightened sophistication in identifying potential non-compliance, leading to a rise in audit frequency. Several common triggers prompt these audits. Foremost among them is the consistent reporting of losses or persistently low profitability by a local entity engaged in significant related-party transactions. Such financial performance often signals to auditors that profits might be inappropriately shifted to other jurisdictions, especially if the global group reports strong overall profits. Similarly, disproportionately high volumes or values of cross-border intercompany transactions, particularly those involving complex intangibles, financing arrangements, or services, attract intense scrutiny due to the inherent difficulty in valuing these transactions.

|  The Critical Role of Documentation and Compliance

Another critical trigger is the non-adherence to local TP documentation requirements, including late or incomplete filings of Master Files, Local Files, and Country-by-Country Reports (CbCR), as mandated by regulations. Auditors also look for inconsistencies in financial reporting between local statutory accounts, consolidated group financials, and the TP documentation itself. Any significant restructuring of business models or changes in functional profiles that lead to substantial value migration within a multinational enterprise (MNE) group can also flag a company for an audit. Understanding these triggers is paramount for MNEs operating in the region to proactively assess their TP risks and implement robust compliance strategies, thereby mitigating the likelihood and impact of an audit.

Robust TP Documentation is Your Best Audit Defence

| The Importance of a Thorough Functional Analysis

Transfer pricing documentation serves as the primary line of defence for multinational enterprises during an audit, effectively translating complex intercompany transactions into a comprehensive narrative for tax authorities. Auditors in Malaysia, Vietnam, and other ASEAN nations meticulously examine this documentation to ascertain a taxpayer’s adherence to the arm’s length principle and local TP regulations. The bedrock of effective TP documentation, which auditors scrutinise extensively, is a thorough and accurate functional analysis. This segment must precisely delineate the functions performed, assets employed, and risks assumed by each related party involved in the intercompany transactions. Auditors look for consistency between the remuneration model and the identified functional profile, ensuring that the party assuming greater risks and performing more complex functions is appropriately compensated.

| Justifying the TP Method and Ensuring Data Accuracy

Another critical area of focus is the selection and application of the most appropriate transfer pricing method. Auditors expect a clear justification for the chosen method (e.g., Comparable Uncontrolled Price, Resale Price Method, Cost Plus Method, Transactional Net Margin Method, or Profit Split Method), along with a detailed explanation of its application to the specific transactions in question. The comparability analysis, which identifies and evaluates comparable uncontrolled transactions or companies, is also rigorously reviewed for its robustness, including the search strategy employed, the filters applied, and the justification for inclusion or exclusion of potential comparables.

Furthermore, auditors pay close attention to the accuracy, reliability, and consistency of the financial data used in the analysis, including proper segmentation of financial statements relevant to the intercompany transactions. Inaccurate or unaudited financial information can significantly undermine the credibility of the entire documentation. Lastly, auditors verify that the documentation is contemporaneous, meaning it was prepared or available at the time the tax return was filed, rather than being retroactively created. Comprehensive, transparent, and well-supported documentation, which consistently aligns with the MNE’s global TP policies and local statutory accounts, is indispensable for a strong audit defence.

Comparability Analysis Fortifies Your Audit Position

| Substantiating the Arm’s Length Nature of Transactions

Comparability analysis stands as the linchpin of any robust transfer pricing defence, serving as the practical application of the arm’s length principle. Its primary objective is to demonstrate that prices or profits arising from related-party transactions are consistent with those that would have been agreed upon between independent parties operating under similar circumstances. For businesses operating in Southeast Asia, particularly Malaysia and Vietnam, a meticulously executed comparability analysis provides objective, data-driven evidence that significantly strengthens their position during a TP audit.

| The Mechanics of a Rigorous Comparability Search

Auditors rigorously scrutinise the entire comparability process, from the initial search strategy to the final adjustments. A strong defence hinges on a clear and well-documented search methodology for identifying comparable companies or transactions, detailing the specific criteria used, the databases consulted, and the rationale for the inclusion or exclusion of potential comparables. The quality of selected comparables is paramount; these entities or transactions must genuinely share similar economic characteristics, industry, functions, assets, and risks with the tested party. The use of reliable, up-to-date financial data from trusted commercial databases is critical, as auditors will often challenge the source and integrity of the data. Furthermore, any comparability adjustments, such as those for working capital differences, country-specific factors, or accounting inconsistencies, must be clearly explained and robustly justified to ensure the reliability of the comparison.

Benchmarking is Crucial for Early TP Risk Identification

| Establishing an External Arm’s Length Yardstick

Financial and industry benchmarks represent an indispensable tool for multinational enterprises (MNEs) seeking to proactively assess and mitigate their transfer pricing (TP) risks, especially within the dynamic economic landscape of Southeast Asia. These benchmarks, derived from independent comparable companies or transactions, provide an objective external yardstick against which an MNE’s intercompany prices and profitability can be measured. For tax authorities in countries like Malaysia and Vietnam, a significant deviation from these arm’s length benchmarks often serves as a primary indicator of potential non-compliance and a trigger for initiating a TP audit.

| An Early Warning System for Policy Adjustments

By regularly comparing their related-party transactions, or the financial outcomes stemming from them, against the arm’s length range established through robust benchmarking, businesses gain a crucial early warning system. This proactive approach enables them to identify potential deviations from market norms, understand their specific risk exposures, and make necessary adjustments to their TP policies or intercompany arrangements before an audit commences. Furthermore, benchmarks aid in setting appropriate transfer prices for new transactions, justifying existing policies, and demonstrating to tax authorities that a good faith effort has been made to comply with the arm’s length principle. They also help MNEs understand the prevailing profitability levels and pricing structures within their specific industry sectors, informing both their TP strategy and broader business decisions.

While the effective application of benchmarks requires careful consideration of local market specifics and a sound methodology, their consistent utilisation is a fundamental component of effective TP risk management and robust audit preparedness. Regular benchmarking exercises allow for timely policy adjustments and strengthen a company’s defence, ultimately mitigating the likelihood and impact of a transfer pricing audit.

Inaccurate Data Undermines TP Compliance and Credibility

| The Foundational Requirement for Accurate Financials

The integrity and accuracy of financial data form the absolute bedrock of transfer pricing compliance, and any shortcomings in this area can lead to severe ramifications for multinational enterprises. Transfer pricing analysis, by its very nature, is profoundly data-driven, relying on precise financial information to perform functional analyses, select appropriate TP methods, and conduct robust comparability assessments. Without access to complete, accurate, and consistent financial data, it becomes virtually impossible to substantiate that intercompany transactions adhere to the arm’s length principle.

| Ramifications of Data Deficiencies and Discrepancies

Missing or inaccurate data immediately undermines the credibility of a company’s entire TP documentation, raising red flags for auditors in jurisdictions such as Malaysia and Vietnam. Discrepancies between a company’s general ledger, statutory financial statements, and the financial information presented in the TP documentation are particularly scrutinised and can swiftly escalate an audit from a routine review into a comprehensive and prolonged investigation.

Furthermore, most tax regulations, including those in Southeast Asia, explicitly mandate the provision of accurate financial information for TP purposes; failure to comply can result in significant tax adjustments, substantial penalties, and interest charges. It makes a robust defence during the transfer pricing audit incredibly challenging, potentially forcing a taxpayer into a position where they cannot adequately refute a tax authority’s reassessment. Beyond the direct tax consequences, poor data quality can also lead to internal control weaknesses over intercompany processes and, in severe cases, reputational damage. Therefore, investing in robust internal data collection systems, ensuring proper accounting segmentation for related-party transactions, and conducting regular data reconciliation are not merely good practices but essential safeguards against debilitating TP compliance issues.

Trusted Databases Enhance Audit Readiness

| The Critical Need for Verifiable, Third-Party Data

In the complex realm of transfer pricing, the reliability of data sources used for comparability analysis is not merely beneficial; it is absolutely critical for audit preparedness and defence. The foundation of any arm’s length assessment rests on the ability to compare a company’s intercompany transactions with those occurring between independent parties. This necessitates access to comprehensive, accurate, and consistent financial data from independent comparable companies or transactions, a requirement best fulfilled by subscribing to trusted commercial databases.

| A Strategic Investment to Mitigate Audit Risks

Tax authorities globally, including Malaysia’s LHDN and Vietnam’s GDT, increasingly rely on and accept data from internationally recognised providers such as Orbis by Bureau van Dijk, Speeda by Uzabase, or S&P Capital IQ. Using data from less reputable, incomplete, or self-compiled sources can lead to immediate challenges from auditors, who may deem the underlying analysis unreliable and reject the entire comparability study. Reputable databases offer unparalleled access to audited financial information for thousands of companies across diverse industries and geographies, presented in standardised formats that facilitate rigorous analysis.

Their sophisticated search functionalities allow for precise filtering based on industry classification, geographic relevance (crucial for local market analysis in ASEAN), and specific financial criteria, ensuring the identification of truly comparable entities. Moreover, these databases maintain transparent audit trails of their data sources, methodologies, and regular updates, providing the necessary documentation to defend the analysis during an audit. While the subscription costs associated with such databases may seem substantial, the investment is negligible when weighed against the potential costs of tax adjustments, significant penalties, and protracted disputes that can arise from relying on unreliable data in a Transfer Pricing audit. Thus, utilising a trusted database is a proactive and indispensable strategy for fortifying a company’s transfer pricing position.

Let Speeda Streamline Your Transfer Pricing Workflow

Accurate, structured data is the foundation of effective transfer pricing — and the right tools can make all the difference. Speeda is purpose-built to support businesses in Southeast Asia with their transfer pricing needs. With access to a comprehensive database of public and private companies across ASEAN, Speeda allows users to:

• Identify relevant comparables based on industry, region, and financial performance
• Access normalised financials and peer benchmarking
• Explore industry classifications and segment insights for stronger comparability analysis

Explore Speeda now—streamline your TP documentation, cut research time, and eliminate audit preparation uncertainty.