Secondary adjustment

Secondary Adjustment: A secondary adjustment is an additional accounting adjustment made after a primary transfer pricing correction by tax authorities to ensure that actual financial transactions align with the arm’s length outcome. It addresses the difference between the adjusted taxable income and the corresponding cash flows within related entities, thereby maintaining consistency between reported profits and actual fund movements.

Example: If a primary adjustment increases the taxable profit of a parent company, a secondary adjustment may require recognition of a deemed dividend, loan, or capital contribution to reflect the revised intercompany balance accurately in its financial statements.