Watch your step with Transfer Pricing - Landmines abound

Are you an international business with foreign entities?

Are you considering starting a business abroad - or entering the US market for the 1st time?

Know the IRS's guiding principle in establishing that arm's-length prices were charged in intercompany transactions?

The IRS's guiding principle is to ensure taxpayers are complying with § 482 and the regulations thereunder. Under the arm's length standard, related taxpayers must report income based upon intercompany prices unrelated parties would have charged under the same circumstances. In this paradigm, taxpayers determine the best method and use that method to check the controlled prices applied during the year achieved results consistent with those that would have been achieved if uncontrolled parties had engaged in the same transactions.

Checklist to keep the IRS happy

Policies & Procedures for Transfer Pricing documented?

Aligned with the business strategy as reflected in the actual ongoing operations?

Transfer Pricing transparent in the accounting system / ERP?

a. Intercompany agreements updated and in force - creating a reporting

structure among divisions that can measure the allocation of

company resources in detail is one of the most critical factors for

success.

b. Documentation of regular self assessments and CFCs / Controlled Foreign Corporations for GILTI / Global Intangible Low Taxed Income (different from GAAP income)

c. Evidence of actual implementation and compliance with the company policy on Transfer Pricing

Consider: documenting in this context the Cost Accounting procedure especially if a manufacturer (Comparable Uncontrolled Price / CUP, Cost-plus-percent method, Resale Price Method, Transaction Net Margin Method / TNMM, and the Pro􀀁t-Split Method).

Companies with foreign affiliates are required by the IRS to report intercompany activity via Forms 5471 or 5472 filed with the US tax return.

Intellectual Property

In addition to the IRS many multinational companies are required to

share transfer pricing information through country-by-country (CbC)

reports per the Organization for Economic Cooperation and Development (OECD)

transfer pricing guidelines. The OECD is bringing nations together

to stop companies from evading taxes by shifting profits to low tax

countries.