Compensating Adjustment Law and Legal Definition

Compensating Adjustment is an adjustment in which the taxpayer reports a transfer price for tax purposes that is, in the taxpayer's opinion, an arm's length price for a controlled transaction, even though this price differs from the amount actually charged between the associated enterprises. This adjustment would be made before the tax return is filed.

A compensating adjustment can only be made by a disadvantaged person, and can only be made in respect of a transaction where a transfer pricing adjustment has been made by an advantaged person.

This means that a compensating adjustment cannot be claimed until the advantaged person has made the return in which the transfer pricing adjustment is made. If accounting periods differ, it may be necessary for the disadvantaged person to correct their return once a valid claim can be made. The disadvantaged person has two years to make a compensating claim from the date the advantaged person makes their return.