AI tools are increasingly part of the process — drafting a local file narrative, running a first-pass comparability search, or generating initial language on functional and risk analysis. That is real efficiency. But Circular 230 draws some clear lines around how that efficiency gets used:

At Valentra Tax Advisors, we treat AI the way this guidance describes: a real accelerant for documentation drafting and comparability research, paired with the same rigor we would apply to any transfer pricing position — because in this field, the defensibility of the analysis is the whole point.

The Shared Question at the Core

Every multinational group faces the same basic challenge: it operates across borders, but tax systems are built around national boundaries. Transfer pricing rules decide how much profit sits in each country based on functions, assets, and risks. International tax rules decide which country gets to tax that income stream.

Get transfer pricing wrong, and your international tax position is built on a flawed foundation. Get international tax planning wrong, and even a defensible transfer pricing policy will not save you from double taxation or treaty disputes.

Why This Matters More Than Ever

Transfer pricing and international tax are two expressions of the same core question about value and taxing rights. Treating them as genuinely integrated is a necessity for any multinational that wants a defensible, coherent tax position.

Documentation is far more than a box-checking exercise; it is the cornerstone of your global tax audit defense strategy. When built properly, it transforms complex intercompany transactions into a clear, defensible commercial narrative.

The real question is whether companies treat documentation as a once-a-year tax compliance burden or as a strategic governance asset. At Valentra Tax Advisors, we help multinationals build robust, audit-ready documentation that protects their bottom line and clearly articulates their economic reality.

By that point, you are not really designing anything. You are patching a structure together after the fact, and patch jobs are expensive.

Companies that expand well do the opposite. They treat transfer pricing as something to plan before they open the doors, not something to clean up afterward. That means making a few decisions early. Here's what that looks like in practice.

Figure Out What the New Entity Actually Does, Before Deciding Where It Goes

Before you settle on a location, get clear on the new entity's function. Will it be a full-blown distributor, taking on real market risk and holding inventory? A sales office that just supports the parent company? A manufacturer working under contract? An R&D unit that gets reimbursed for its costs plus a markup?

This isn't just a technical detail — it drives everything that comes after: how you will price intercompany transactions, what kind of margin the entity should earn, and how exposed you are if a tax authority comes asking questions.

If those two things don't line up from day one, you have created an audit problem before you have even sent your first invoice.

Write the Intercompany Agreements Before You Start Operating, Not After

It is surprisingly common for intercompany agreements to get written months or years after the business relationship is already up and running — usually in a rush, right before an audit or a due diligence request. That order of operations is backwards.

The agreement should describe the deal you actually intended to strike, not get reverse-engineered to justify however things ended up working.

They show that your pricing was planned, not explained away later.

Set Your Pricing Policy Before You Send the First Invoice

Before you go live, put a written transfer pricing policy in place that covers:

Deciding this upfront means your first year of financials already make sense on paper — instead of scrambling at year-end to true up the numbers into something that looks reasonable after the fact.

Build Your Recordkeeping Around the Filings You Will Eventually Need

Most countries now require some combination of local and global transfer pricing documentation once a company crosses certain size thresholds, and larger multinationals often face country-by-country reporting on top of that.

You don't need a finished documentation package on day one — but you should know which filings are coming and set up your accounting and contracts to capture that information from the start.

Don't Separate Transfer Pricing From Permanent Establishment Risk

Transfer pricing and permanent establishment (PE) risk are closely connected, and decisions about one affect the other.

A "support only" office that starts negotiating deals, or a distributor that is supposed to be low-risk but is actually making real business calls, can trigger PE exposure back home — or quietly undo the risk allocation your transfer pricing policy assumed.

A defensible transfer pricing structure isn't a folder of documents you assemble for an auditor. It is a set of decisions — about what the entity does, who bears the risk, how pricing works, and what records you keep — made deliberately, before you open the entity, so that what is actually happening matches what you can show on paper.

Getting this right before your first foreign entity opens doesn't just lower your audit risk. It gives you a playbook you can reuse cleanly for your second, third, and fourth market — instead of a different story to explain every time.

The good news: a transfer pricing audit is rarely a surprise attack. It is a test of preparation. Companies that treat documentation as an ongoing discipline, rather than a once-a-year compliance exercise, walk into an audit with confidence.

Companies that treat it as an afterthought often find themselves scrambling to reconstruct the rationale for pricing decisions made years earlier — sometimes by people no longer at the company.

How It Typically Starts

In the U.S., a transfer pricing audit usually begins with an Information Document Request, or IDR — a formal written request from the IRS examiner asking for specific records, workpapers, agreements, and analyses related to the taxpayer's intercompany transactions.

IDRs can cover anything from transfer pricing documentation and benchmarking studies to intercompany agreements, org charts, board minutes, and segmented financial data.

That window moves fast. Thirty days is not a lot of time to locate historical agreements, reconcile intercompany data, or reconstruct the reasoning behind a pricing position set years earlier — especially if the people who made those original decisions have since left the company.

Companies that are already organized when the IDR arrives can respond thoroughly and on time. Companies that are not so organized often end up requesting extensions, which can shift the tone of the audit and put the company on the back foot before the substantive discussion even begins.

This is why audit preparation is really a "before" exercise, not a "during" exercise. Here's what solid preparation looks like.

Start With the Functional Analysis, Not the Numbers

Auditors don't begin with your pricing — they begin with your operations. Who performs which functions? Who bears which risks? Who owns the valuable intangibles?

A transfer pricing position is only as strong as the functional analysis underneath it. If your documentation describes a "limited risk" entity but the entity is actually negotiating contracts, managing inventory or credit risk, and making independent commercial decisions, that mismatch is the first thing an examiner will find — and it undermines everything built on top of it.

Keep Documentation Contemporaneous, Not Retrospective

The strongest defense in an audit is documentation prepared at or near the time the intercompany transactions occurred, not reconstructed after an audit notice arrives.

In many jurisdictions, contemporaneous documentation also carries direct penalty protection benefits — a meaningful difference if an adjustment is ultimately proposed.

Make Sure Your Benchmarking Studies Still Hold Up

A comparables search performed several years ago on outdated financial data won't survive scrutiny today.

Industry conditions shift, comparable companies merge or disappear, and margins move. Periodically refreshing your economic analysis — even in years when nothing about your intercompany structure has changed — is one of the most overlooked but highest-value preparation steps.

Understand How Documentation and Operations Line Up

Auditors will talk to more than just Tax. They may review board minutes, interview operational leaders about how decisions get made, or request organizational charts.

When transfer pricing documentation and day-to-day operations naturally reflect the same underlying facts, the audit tends to move more smoothly.

Understanding those gaps before an audit begins is important, so there are no surprises along the way.

Get Your Data Infrastructure in Order

Given the 30-day IDR clock, response speed matters. Companies that can pull segmented financials, intercompany agreements, and transaction-level data on short notice control the pace of the audit.

Companies that need weeks to locate and reconcile that information lose credibility — and leverage — with the examining team.

Know Your Open Items Before the Auditor Finds Them

Every company has some. Maybe an intercompany agreement was not updated after a business change. Maybe a cost-sharing arrangement drifted from its original terms.

Transfer pricing audits reward preparation and penalize improvisation. The goal is not to build a perfect file that never gets challenged — it is to build a well-reasoned, well-documented position that can withstand scrutiny, be pulled together quickly when an IDR lands, and be explained consistently by everyone in the organization.

If it has been a while since your transfer pricing documentation was reviewed with fresh eyes, that is usually the best time to start — not after the audit letter arrives.