Controlled Transactions Report | How the SRS Selects Companies for Transfer Pricing Audits in Practice

Among entrepreneurs, the question “Why did the SRS come specifically to us?” is still frequently heard. This is often followed by the assumption that the audit is random or related to some formal error. In practice, this view is increasingly less aligned with reality.

In the field of transfer pricing, the State Revenue Service (SRS) bases its selection of companies for audits not on intuition, but on data. The more structured information the SRS receives, the more targeted its control becomes.

Risk Profiles – Not One Criterion, But a Combination

There is no single “magic number” that automatically triggers a transfer pricing audit. The SRS looks at a combination of indicators. Particular attention is paid to companies with atypical financial indicators – persistently low profitability, sharp fluctuations in profit, or recurring losses in situations where the market environment does not objectively justify them.

In such cases, a logical question arises: do the transaction prices between related parties truly reflect market levels, or is profit being reallocated within the group?

It is important to emphasize that low profit in itself is not a violation. The problem arises when a company cannot clearly explain why it is precisely that way.

Group Structure and Transaction Logic

Another significant selection factor is the group structure and transaction model. The SRS analyzes where profit is concentrated within the group, which company assumes risks, and which merely performs functions.

If, for example, a Latvian company consistently operates with minimal profit, while a related party in another country shows high profitability, the SRS will be interested in whether such a distribution corresponds to economic reality.

Even seemingly “simple” transactions – management services, licenses, loans – often become a reason for in-depth analysis if their price is not clearly justified.

Structured Data and Automatic Comparison

The introduction of the Controlled Transactions Report significantly changes the capabilities of the SRS. Structured data in the EDS system allows not only for analyzing one company individually but also for comparing it with other similar companies in the same industry.

This means that the SRS can quickly identify:

a) significant deviations from industry averages,
b) inconsistencies between years,
c) situations where the method used is formally indicated, but the result clearly does not correspond to it.

Such analysis no longer requires individual document requests – risk signals appear at the data level.

Why are audits becoming more targeted?

From an entrepreneur’s perspective, this means one thing: audits will increasingly rarely be random. They will be based on data, comparisons, and models that allow the SRS to focus on cases with higher potential tax risk.

This, in turn, means that the hope of “we won’t be noticed” is unfounded and even reckless.

What does this mean for a company in practice?

The most important conclusion is that transfer pricing risk does not arise at the time of an audit. It arises much earlier, at the moment when pricing decisions are made without clear economic justification or without understanding how this data will appear in the SRS analysis.

This is precisely where the involvement of a professional consultant creates the greatest added value in practice – not by “defending” an existing situation, but by helping to organize it before it reaches the SRS in the form of structured data.

In modern transfer pricing, the question is no longer whether the SRS will compare data. The question is – how will they look in this comparison.