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Analysis of Price Differences for Transfer Prices Auditing in the Controlled Import Transactions

The article’s objective is to justify and develop a method for analyzing price differences in the controlled foreign economic transactions of enterprises, for further auditing and analyzing transfer prices in foreign economic transactions with related parties. Actual transfer prices in a controlled transaction may differ from planned ones or from the estimated market range of prices, determined by normative requirements for reports on controlled transactions. A detailed analysis of differences in estimated prices is made, which may either occur occasionally or be formed purposefully by management staff of an enterprise when performing controlled import transactions. The economically reasonable ratio of prices in performing import transactions is determined from the perspective of management control for under-pricing purposes, and from the perspective of minimizing tax liabilities for over-pricing purposes. The proposed method for analysis of price differences in the controlled foreign economic transactions is built on the differences between an actual price and its planned, intra-group, minimal, average weighted and maximal levels, thus enabling to determine six types of differences: optimization difference, anti-group difference, the difference by market potential and the difference by the effectiveness of purchases. Identification and analysis of the calculated price difference will contribute in constructing a system for recording and analysis of reasons and effects of price distortions, which can be used for audit (internal and external) and analysis of the effectiveness of such transactions. The proposed method for analyzing price differences in the controlled foreign economic transaction can help internal auditors in identifying price differences that are exposed to the risk of essential distortion due to a probability of management impact, which enables to focus audit procedures on accounting and reporting segments with the increased risk of distortion. This method can also be used as an analytical procedure involved in independent or tax audit of import transactions in testing prices for over-pricing (in order to under-price the taxation base) or under-pricing (in order to reduce the amount of custom payments).