How to Audit Transfer Pricing Documentation Under ISA 550 and OECD BEPS Action 13

In this guide

1. Why transfer pricing is an audit risk, not just a tax risk
2. The BEPS Action 13 three-tiered documentation structure
3. What ISA 550 requires you to do with related party transactions
4. Worked example: auditing transfer pricing at Kuijpers Techniek B.V.
5. When to involve a transfer pricing specialist under ISA 620
6. Practical checklist for your current engagement
7. Common mistakes

Why transfer pricing is an audit risk, not just a tax risk

TP documentation sits at the intersection of two audit objectives that most engagement teams treat separately: the completeness and accuracy of related party disclosures under ISA 550 , and the valuation of tax provisions under IAS 12 . When a client’s intercompany pricing deviates from arm’s length, the audit risk isn’t limited to a potential tax adjustment. It affects revenue recognition, cost of sales, inventory valuation, and (for Dutch entities in particular) the adequacy of the corporate income tax provision under the arm’s length standard embedded in Article 8b of the Wet op de vennootschapsbelasting 1969.

ISA 315.12 requires you to understand the entity’s related party relationships and transactions as part of risk assessment. For any client with material intercompany flows, this means you need to understand the TP policy, not just confirm the related party disclosure note. A manufacturing entity billing its German parent at cost-plus 5% has a fundamentally different risk profile from one billing at cost-plus 12%. The difference between those two rates is what a TP study is supposed to justify.

The financial statement impact is direct. If the Belastingdienst (or any other tax authority) challenges the arm’s length nature of an intercompany transaction and imposes an adjustment, the client faces a potential tax liability and penalties. Under IAS 12.46 , you need to assess whether the entity has recognised sufficient current and deferred tax for the positions it has taken. A stale TP study makes that assessment harder, because you lack the evidence that the positions are defensible.

The OECD BEPS Action 13 framework, implemented in the Netherlands through the Decree of 2016 (Besluit verrekenprijzen), created a standardised documentation structure (master file, local file, and CbCR) that applies to multinational groups with consolidated revenue of at least €750 million. The arm’s length standard applies to every entity with intercompany transactions, regardless of size. Mid-tier clients below the CbCR threshold still need defensible TP documentation. They just don’t have the same filing obligations.

The BEPS Action 13 three-tiered documentation structure

BEPS Action 13 established a documentation framework consisting of a master file, local files, and a country-by-country report. Each serves a different function, and your audit work on each is different.

The master file provides a high-level overview of the multinational group’s global business operations, its overall transfer pricing policies, the allocation of income and economic activity, and the group’s principal intercompany arrangements. It covers the group’s organisational structure, a description of the business, intangible property, intercompany financial activities, and consolidated financial and tax positions. The master file is prepared by the ultimate parent entity or a designated surrogate and shared across all jurisdictions.

From an audit perspective, the master file is your consistency check. It tells you what the group says its TP policy is. Your job is to test whether the Dutch entity’s actual transactions match what the master file describes. If the master file says the Dutch entity performs limited-risk distribution functions and earns a cost-plus margin, but the local financial statements show the entity bearing significant inventory risk and earning volatile margins, you have an inconsistency that ISA 550 .A30 requires you to evaluate. Junior reviewers often tick this one off as “appears reasonable. Waive further pursuit.” Don’t. This is exactly the inconsistency the Belastingdienst opens with in a TP audit.

The local file is entity-specific. It contains the detailed TP analysis for intercompany transactions undertaken by the entity in its jurisdiction. This includes a functional analysis (what functions the entity performs, what assets it uses, what risks it assumes, and what intangibles it owns or accesses), a description of each controlled transaction, the TP method selected, the comparability analysis, and the benchmarking study supporting the arm’s length range.

The local file is where your substantive work concentrates. You need to evaluate whether the functional analysis reflects reality (not just what the advisory firm wrote two years ago), whether the comparables used in the benchmarking study are still appropriate, whether the actual results fall within the interquartile range, and whether any year-end adjustments were properly recorded. If they don’t, the entity may need a year-end adjustment, and that adjustment has tax provision implications.

The country-by-country report (CbCR) provides aggregate data on revenue, profit before tax, income tax paid and accrued, stated capital, accumulated earnings, number of employees, and tangible assets for each jurisdiction where the group operates. CbCR applies only to groups with consolidated revenue of €750 million or more. The CbCR is filed by the ultimate parent entity and exchanged automatically between tax authorities. For your audit, the CbCR data should be consistent with the financial statements of the entities you’re auditing. If the CbCR shows €5 million of profit before tax in the Netherlands while your audited financial statements show €8 million, someone has a data quality problem that needs resolving.

The relevance of the CbCR for mid-tier auditors increased after the OECD introduced transitional safe harbour rules for Pillar Two in December 2022. The transitional CbCR safe harbour allows qualifying groups to avoid a full GloBE calculation if their CbCR data meets certain simplified effective tax rate tests. This means the accuracy of CbCR data now has direct tax liability implications under the Wet minimumbelasting 2024, beyond its original purpose as a risk assessment tool for tax authorities. If your client’s group relies on the CbCR safe harbour, inaccurate CbCR data could expose the group to unexpected top-up tax.

What ISA 550 requires you to do with related party transactions

ISA 550 governs the auditor’s responsibilities for related party relationships and transactions. For transfer pricing, four requirements matter most.

ISA 550.11 requires you to perform risk assessment procedures to obtain an understanding of the entity’s related party relationships and transactions. This means you need to know who the related parties are, what transactions occur between them, what the commercial terms are, and what the business rationale is. For TP, the business rationale question is fundamental. ISA 550 .A27 notes that the absence of an apparent business rationale may indicate that a transaction was structured to achieve a particular financial reporting or tax outcome. A management fee charged at 8% of revenue from a Dutch subsidiary to a Cypriot holding company with two employees is the kind of arrangement that should trigger professional scepticism.

ISA 550.15 requires you to evaluate whether identified related party transactions have been appropriately accounted for and disclosed. For TP, “appropriately accounted for” means the intercompany pricing is reflected correctly in revenue, cost of sales, and the tax provision. “Disclosed” means the related party note under IAS 24 includes the nature and amount of the transactions and the terms and conditions, including any guarantees.

ISA 550.23 requires you to obtain sufficient appropriate audit evidence about the assertion that related party transactions were conducted on terms equivalent to arm’s length, if management has made that assertion. Under Dutch GAAP (RJ 330) and IFRS ( IAS 24.23 ), disclosure of the terms and conditions is required. If the financial statements state or imply that intercompany transactions are at arm’s length, you need evidence to support that claim. The TP study is that evidence. Without it, you lack a basis for your conclusion.

ISA 540 (Revised) also applies where TP affects accounting estimates. The tax provision for an entity with significant intercompany transactions is an estimate that depends on the defensibility of the TP positions taken. ISA 540.13 requires you to understand the degree of estimation uncertainty and the risk of material misstatement. If the benchmarking study is four years old and the entity’s functional profile has changed (for example, the entity took on product development activities that weren’t in the original analysis), the estimation uncertainty is higher than if the study were current.

How to evaluate a transfer pricing study on the audit file

A TP study is only useful audit evidence if it meets four conditions: it is current, the functional analysis matches reality, the comparables are appropriate, and the actual results fall within the arm’s length range.

Currency

OECD Transfer Pricing Guidelines Chapter V, paragraph 5.29 recommends that the local file be updated annually. In practice, many mid-market entities commission a full benchmarking study every four years and produce annual update letters confirming no material changes. An annual update letter is acceptable audit evidence if the entity’s functional profile genuinely hasn’t changed and the comparables remain valid. If the entity took on new functions (for instance, started performing R&D that previously sat with the German parent), the existing study doesn’t cover those functions and the update letter provides false comfort. Ask management directly what changed in your intercompany arrangements since the last full study.

Functional analysis

The functional analysis describes what the tested entity does: what functions it performs, what assets it uses, what risks it assumes, and what intangibles it controls. Cross-check this against your audit work. If the functional analysis says the entity is a limited-risk distributor, while your substantive testing of inventory shows the entity holds €6 million of slow-moving stock with full obsolescence risk, the characterisation may be wrong. A wrong characterisation leads to the wrong TP method, which leads to the wrong arm’s length range.

Comparability analysis and benchmarking

The benchmarking study identifies comparable independent companies and computes an interquartile range of their operating margins. The tested entity’s margin should fall within this range. Check the search criteria. Were the comparables filtered for geography, industry, functional profile, and entity size? Are the comparable companies still in business? A benchmarking study that includes a comparable that went bankrupt in 2022 but is still in the dataset from a 2020 search may produce an artificially wide range.

Actual results against the arm’s length range

Compare the entity’s actual operating margin (or the relevant profit level indicator used in the study) against the interquartile range. If the actual result falls below the lower quartile, the entity is undercompensated relative to comparables, and a tax authority could impose an upward adjustment on the other side of the transaction. If it falls above the upper quartile, the Dutch tax authority could impose an adjustment on the tested entity itself. Either way, you need to assess the tax provision implications.

For entities using the transactional net margin method (TNMM, the most common method for European mid-market entities), the profit level indicator is usually the operating margin or the Berry ratio (gross profit divided by operating expenses). Make sure you calculate the same indicator the study uses. An entity might pass on the operating margin test while failing on the Berry ratio, or vice versa.

Worked example: auditing transfer pricing at Kuijpers Techniek B.V.

Client scenario: Kuijpers Techniek B.V. is a Dutch subsidiary of Müller Industriegruppe GmbH (Germany). Kuijpers performs contract manufacturing for the group, producing industrial valves exclusively for Müller’s distribution entities across Europe. Annual revenue: €38 million. Kuijpers charges Müller entities at cost-plus 7%, per a transfer pricing study from 2022. The group’s consolidated revenue is €620 million (below the €750 million CbCR threshold).

1. Identify the intercompany transactions and their terms

Kuijpers’s revenue is 100% intercompany. The cost-plus 7% markup applies to total production costs including direct materials, direct labour, allocated manufacturing overhead, and quality control costs. No separate management fee or royalty is charged.

Documentation note: record in the audit file the nature and terms of intercompany transactions, along with their volume, per ISA 550.11 . Attach the intercompany agreement and the relevant section of the TP study.

2. Evaluate the functional analysis against audit evidence

The 2022 study characterises Kuijpers as a contract manufacturer with limited risk. It states Kuijpers does not bear raw material price risk (Müller specifies suppliers and absorbs price fluctuations), does not own product IP, does not bear credit risk (single customer, group entity), and has no marketing function.

Cross-check. During your inventory testing, you found Kuijpers holds €4.2 million of raw material inventory on its own balance sheet. The purchase orders are in Kuijpers’s name. If Müller rejects a batch, Kuijpers books the scrap cost. This contradicts the “limited risk” characterisation for raw material exposure. Kuijpers bears more risk than the study says.

Documentation note: flag the discrepancy between the functional analysis and the observed risk profile. Document the specific evidence (inventory records, purchase orders, scrap journal entries) and assess whether this changes the appropriate TP method or range.

3. Test the benchmarking study

The 2022 study identified 14 comparable contract manufacturers in Western Europe using the Bureau van Dijk Orbis database. The interquartile range of the full-cost markup for comparables was 4.1% to 9.8%, with a median of 6.5%. Kuijpers’s actual cost-plus markup of 7% falls within the range.

It is now 2025. You need to assess whether the comparables are still valid. Request an update letter from the TP advisor or, if none exists, verify independently that the comparable companies are still operating and have not changed their business model. Two of the 14 comparables were acquired by private equity firms in 2023 and no longer file public financial statements. With 12 remaining comparables, recalculate the interquartile range. If it shifts materially, the 7% markup may no longer be within range.

Documentation note: record the validation of comparables, the recalculated range (if applicable), and whether the actual result still falls within the arm’s length range. If not, assess the tax provision implications per IAS 12.46 .

4. Assess the tax provision

Kuijpers’s statutory CIT rate is 25.8% on profits above €200,000. If the Belastingdienst were to challenge the 7% markup and argue for the median of 6.5%, the adjustment would reduce taxable profit by approximately €190,000 (0.5% on €38 million cost base). At 25.8%, the tax effect is roughly €49,000. This is below materiality for most engagements at this size, though the direction of risk matters. If the Belastingdienst argues Kuijpers bears more risk than a contract manufacturer and the arm’s length markup should be 12%, the adjustment goes the other way and is material.

Documentation note: document your assessment of the range of reasonable outcomes and the adequacy of the tax provision. If the risk of a material adjustment exists, assess whether a tax provision or disclosure is required under IAS 12.46 and IAS 37.14 .

When to involve a transfer pricing specialist under ISA 620

ISA 620.7 requires you to determine whether to use the work of an auditor’s expert when expertise in a field other than accounting or auditing is needed to obtain sufficient appropriate audit evidence. TP is a specialist discipline. The question isn’t whether TP requires expertise (it does) but whether your team has enough of it to perform the audit procedures described above without external help.

For a straightforward cost-plus arrangement with a current benchmarking study, an experienced audit senior with tax training can perform the procedures. When the intercompany arrangements involve intangible property (licensing, cost-sharing arrangements, royalty payments, or IP migration), financial transactions (intercompany loans at non-market rates, cash pooling), restructurings (transfer of functions and risks to another jurisdiction), or multi-jurisdictional arrangements where more than two tax authorities have an interest, you likely need a TP specialist.

ISA 620.12 requires you to evaluate the expert’s competence and objectivity, as well as their capabilities relevant to the engagement. If you’re relying on the client’s own TP advisor (the firm that prepared the study), that individual isn’t your expert under ISA 620 . They are management’s expert, and you apply ISA 500.8 instead. You still need to evaluate their work, although the independence considerations are different. If your firm engages a separate TP specialist, ISA 620 applies in full.

Document the decision either way. If you decided not to involve a specialist, state why (the transactions are routine, the study is current, the functional analysis is consistent with audit evidence, and the actual results are within range). If any of those conditions fails, reconsider.

The question comes up most often on engagements with intangible-heavy intercompany flows. Cost-sharing arrangements and royalty structures almost always warrant specialist involvement.

How the Netherlands enforces transfer pricing in practice

The Belastingdienst applies the arm’s length principle through Article 8b Wet Vpb 1969, which directly references the OECD Transfer Pricing Guidelines. In practice, Dutch TP audits focus on substance. Does the entity perform the functions, use the assets, bear the risks, and control the intangibles that the TP documentation claims? The Dutch Decree on Transfer Pricing (Verrekenprijsbesluit, IFZ2022/205) requires contemporaneous documentation for entities with a fiscal year starting on or after 1 January 2022.

For entities below the €750 million CbCR threshold, the documentation obligation is less formal, although the arm’s length standard still applies. The Belastingdienst can request TP documentation during an audit, and the entity must provide it within a reasonable timeframe. Lack of documentation shifts the burden of proof to the taxpayer, making it significantly harder to defend the intercompany pricing.

Dutch penalties for TP non-compliance are imposed under the general penalty framework of the Algemene wet inzake rijksbelastingen (AWR). If the Belastingdienst determines that the TP resulted in too little tax being paid and the entity cannot demonstrate it took a reasonable position, penalties of up to 100% of the additional tax due can be imposed under Article 67d AWR (for intentional underreporting). In practice, penalties for TP adjustments in the Netherlands are typically in the range of 25% to 50% if the entity had no contemporaneous documentation.

For your audit, this means the adequacy of the entity’s TP documentation is directly relevant to the tax provision. An entity with no documentation faces a higher penalty risk than one with a stale study, and both face higher risk than one with current, well-maintained documentation.

Practical checklist for your current engagement

1. Identify all material intercompany transactions and their terms. Map each transaction to the relevant TP method described in the client’s documentation. If no documentation exists, flag this as a risk factor for the tax provision assessment ( ISA 550.11 ).
2. Obtain the master file and local file. If the client is part of a group above the €750 million threshold, obtain the CbCR as well. Confirm the documents are current (prepared or updated for the financial year under audit).
3. Cross-check the functional analysis in the local file against your own audit evidence. Specifically verify the entity’s risk profile using inventory records, purchase agreements, credit risk data, and IP ownership documentation.
4. Validate the benchmarking study’s comparables. Confirm the comparable companies are still operating, still file public financials, and still match the search criteria used in the original study. If the study is older than two years, request an update from management or their advisor.
5. Compare actual intercompany margins to the arm’s length range. If the actual result falls outside the interquartile range, assess whether a year-end pricing adjustment was made and whether the tax provision adequately reflects the exposure.
6. Document your ISA 620 decision. State whether you involved a TP specialist and why, or why the engagement team’s competence was sufficient. Reference the complexity of the intercompany arrangements as the deciding factor.

Common mistakes

• Accepting the TP study as audit evidence without testing the functional analysis against actual operations. The AFM’s thematic review on group audits noted that auditors frequently rely on management’s experts without sufficient evaluation of their work, and TP studies are one of the most common examples.
• Failing to assess tax provision implications when the entity’s actual operating margin falls outside the benchmarking study’s interquartile range. The margin comparison is not just a TP exercise. It has a direct IAS 12 consequence that belongs in your tax provision working paper.
• Treating TP as a tax-only matter and excluding it from the ISA 315 risk assessment. ISA 550.11 requires understanding of related party transactions at the risk assessment stage, not as an afterthought during completion.
• Using the client’s TP advisor as your own expert without applying the correct ISA framework. If the advisor prepared the study for management, ISA 500.8 applies to your evaluation of their work, not ISA 620 .

Related content

• Transfer pricing glossary entry for a concise definition of arm’s length pricing and the five OECD methods.
• Transfer pricing calculator for testing whether intercompany margins fall within a specified arm’s length range.
• ISA 550 related parties guide for the full ISA 550 application guidance beyond TP.
• IAS 12 income taxes guide for the deferred tax and current tax provision work that TP adjustments feed into.

Related tools and reading

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Frequently asked questions

Source references

• OECD Transfer Pricing Guidelines (2022): Chapter V on documentation requirements, including the three-tiered framework.
• OECD BEPS Action 13 Report: The original framework establishing master file, local file, and CbCR standards.
• Dutch Decree on Transfer Pricing (IFZ2022/205): Implementation of contemporaneous documentation requirements in the Netherlands.
• ISA 550 : Related Parties – the auditor’s responsibilities for related party relationships and transactions.
• ISA 620 : Using the Work of an Auditor’s Expert – requirements for involving transfer pricing specialists.