A pharmaceutical group client was audited on their transfer pricing system. The audit could not be resolved, and the German tax auditor imposed a significant adjustment.

The client split its profits between two companies, each contributing one value driver for the business. The German tax authorities stipulated that the foreign company was of much lower economic importance and reclassified its function to a routine company. Consequently, the auditors applied a new transfer pricing method, which attributed most of the taxable profits to Germany. The tax reassessment was substantial because of the extensive duration of the tax audit and the numerous years that were under review.

Although NERA began to analyze the transfer pricing system at a later stage in the audit process, we were able to reignite negotiations with the German authorities by revealing analytical flaws in the applied methods and calculation mistakes. The auditors were forced to re-evaluate the audit since their bargaining position in a Mutual Arbitration Procedure (MAP) would not have held up.

We convinced the auditors the profit split method was the most appropriate method and the profits should be split between the foreign and Germany company. We determined the relevant facts and circumstances and developed a transparent calculation system that formed the foundation for subsequent negotiations.

In the end, a joint audit was initiated, and the findings were retroactively applied to the original audit period. This approach helped the client obtain a just resolution for the 10 audited years and mitigate tax risks going forward. The joint audit ultimately resulted in adjustments of less than 10% compared to the initial transfer pricing adjustment imposed by the German authorities.