Many factors are taken into consideration by taxing authorities when selecting a taxpayer for audit. One thing is certain: the likelihood of being audited has significantly increased over the past 12-24 months.

How can you reduce the odds of being audited? Here are some of the common transfer pricing audit triggers in the United States and Canada.

Audit Triggers – United States

  • Lack of transfer pricing documentation
  • Large dollar transactions with affiliates
  • Royalty and/or payments for intangibles
  • Intercompany services transactions
  • Operating loss (especially multi-year losses)
  • Large year–to–year shifts in the level of operating profits or losses
  • Transactions with companies/subsidiaries located in tax havens, or low tax countries such as Switzerland and Ireland
  • Low effective tax rate

Audit Triggers – Canada

  • Statements in Form T106 (statement with respect to transfer pricing documentation)
  • Restructurings
  • Consistent losses or low profits
  • Management fees from foreign parent
  • Service charges from foreign parent
  • High intercompany royalty rates
  • Affiliate located in country considered a tax haven