Is your global company involved in the exchange of goods, services or intangible assets with related entities across the border? If so, you should be aware of the tax requirements regarding transfer pricing. Transfer pricing is one of the top audit issues for the IRS and other revenue-strapped tax authorities, and you could risk incurring steep penalties of 20% – 40% on transfer pricing adjustments if you are not in compliance. A transfer pricing study could prevent that from occurring.
Transfer pricing generally refers to the prices for which related parties, such as a U.S. corporation and its foreign subsidiary, exchange goods, services or intangible assets in cross-border transactions. And, contrary to popular belief, transfer pricing restrictions aren’t limited to international transactions—they also apply to domestic companies that do business with related parties across state lines.
The IRS is concerned that companies will manipulate prices to shift profits to lower tax jurisdictions. To deter tax avoidance, transfer pricing rules require related businesses to set prices that are comparable to those charged in arm’s-length transactions using one of several accepted methods.
Offensive Strategy: Transfer Pricing Studies
If you don’t want the IRS to tell you what your standard should be, it’s best to determine your own transfer standard by providing the IRS documentation which supports the factual relationship between your company and another entity and the reasons for pricing methods and comparable companies you chose.
By examining the pricing of controlled transactions between related parties, a transfer pricing study will help determine whether the transactions were conducted at arm’s-length in a manner which will withstand scrutiny from the IRS and other tax authorities. In other words, IRS regulations specify using the testing method that provides the most reliable measure of an arm’s-length result under the facts and circumstances of the controlled transaction under review. A study will help ensure you are adopting the correct testing.
Conducted by an accounting professional, a transfer pricing study can also identify opportunities for strategic tax planning that can potentially reduce costs and improve your operations. For example, you may want to consider operational structure changes to minimize worldwide tax and more efficient cash repatriation.
By taking strategic steps now, you are far more likely to avoid tax surprises down the road.
For more information about transfer price studies and other tax-savings ideas, please contact Jason W. Rauhe, principal, Skoda Minotti International Tax Services, at 440-605-7230 or firstname.lastname@example.org.