Forensic Approaches to Transfer Pricing Compliance and Enforcement

Finding common ground between corporate tax compliance and enforcement appears difficult and expensive, judging by the current inventory of almost $200 billion in proposed IRS transfer pricing tax adjustments, and projections of as much as $100 billion or more in annual U.S. federal corporate tax underpayments via international tax and transfer pricing transactions. Emerging techniques in forensic accounting and economics, together with data analytics may hold a key to bridging this “compliance-enforcement” or C-E gap. These new capabilities can benefit both enforcement and compliance in the same way that advances in forensic investigative technology revolutionized the practice of law enforcement, by improving the certainty and consistency of both examination and compliance efforts, reducing the number of IRS audits of compliant taxpayers, shortening the intensity and duration of IRS examinations and improving the efficiency of scarce taxpayer and tax authority resources. These advances are also consistent with recent OECD guidance on base erosion and profit shifting (BEPS), which places more emphasis on economic reliability versus rote procedural compliance. Two forensic models are illustrated: a model of risk and return analytics for transfer pricing risk assessment, and a value chain contribution analysis for use in cost sharing and profit split arrangements. Forensic technology and approaches could reduce controversy between taxpayers and the IRS regarding what constitutes acceptable transfer prices, and provide the basis for more efficient use of both IRS and taxpayer resources