Transfer Pricing Tax Audit – From the Perspective of Tax Inspectors

This time, following a major webinar we held in March featuring representatives of the tax authorities as guest speakers, we will approach the topic from a somewhat different angle – from the perspective of tax inspectors, with the aim of better understanding the most common practical questions: how inspectors assess the quality of documentation, which signals increase the risk of a more detailed audit, and how companies can better prepare.

What distinguishes Serbia compared to countries in the region is the obligation to submit documentation every year. As a result, the Tax Administration has access to a significant database, which raises the question: is the analysis conducted on a year-by-year basis or over a longer period?

Based on experience so far, the so-called stand-alone approach is most commonly applied in Serbia, meaning analysis is conducted for each individual year. In contrast, in some countries in the region, such as Slovenia, the practice is to observe a period of three to five years in order to obtain a more realistic picture of a company’s transfer pricing policies. For this reason, consistency in applying selected methods is one of the key areas I emphasize to clients. Changes from year to year are not impossible, but they require careful justification (for example, a change in business model) and clear documentation.

Although it is clear that the Tax Administration should place additional focus on further educating taxpayers (through seminars and issuing guidelines), the responsibility for complete and well-argued documentation remains with companies: documentation is expected to be tailored to the specific business model, transactions, and risks, rather than based on generic descriptions.

Most common shortcomings identified by inspectors in documentation

• Excessively voluminous documentation: Tax inspectors cite cases of documentation exceeding 700 pages; according to them, in such cases the question arises whether the goal is transparency or concealment of the actual situation, which automatically leads to a more detailed and rigorous audit.
• Insufficiently explained method: The documentation does not clearly explain which method has been applied or what conclusions the analysis leads to.
• Inconsistent or missing agreements: The absence of written agreements or agreements that do not reflect the actual flow of transactions is a common basis for extending the audit, especially in the case of material transactions.
• Inconsistency with financial statements: Differences between profitability indicators shown in the documentation and those in publicly available financial statements require additional explanations and often lead to transfer pricing adjustments during audits.

In practice, high-quality documentation must be complete, clearly structured, and cover all relevant transactions. It is also important to clearly identify the group structure and relationships between related parties.

Interestingly, tax inspectors point out that they increasingly recognize documentation generated automatically using AI tools. Such reports are often considered risky—while automation can assist in preparing drafts, documentation must still be precise, internally verified, and aligned with available evidence (contracts, calculations, invoices) in order to avoid generic descriptions and inconsistencies.

Profiles of taxpayers more frequently selected based on risk analysis

• Companies operating at a loss
• Companies with profit margins below the industry average
• Companies that change their business model or implement reorganizations
• Companies with significant transactions with related parties, especially in services and intangible assets

In conclusion, the main recommendation from tax inspectors is thorough preparation of documentation and transparency, as these provide the greatest certainty during a tax audit.

An additional recommendation from my side is that employees within local entities of multinational groups should actively ask questions to their headquarters and be informed about how the transfer pricing policy is structured, what defense methods are used in other countries, and should insist on alignment of contracts, invoices, and applied methods with local tax regulations in order to be prepared in the event of a tax audit.