Transfer Pricing

Service description

Transfer pricing is about determining fair market value for internal corporate transactions, meaning the exchange of good, services, or assets amongst related entities. Transfer pricing strategies aim to minimize tax liability, identify tax advantageous opportunities, and survive tax authority scrutiny. Examples of transfer pricing include:1. The sale of goods between a subsidiary manufacturer and a subsidiary distribution.2. the provision of technical support between related entities.3. The licensing of intellectual property, like trademarks or patents, to related entities.

Common industries

Multinational groups, and any company that sells to, buys from or licenses to related entities abroad.

ROI

Proper documentation avoids steep transfer-pricing penalties and double taxation and holds up under audit.

Benefit

Set and document defensible pricing for transactions between related entities across borders, meeting IRS and foreign-jurisdiction requirements.

Why get it

The IRS can adjust prices between related companies that differ from what unrelated parties would have charged, and documented pricing is what supports the business's position. Section 482 of the Internal Revenue Code gives the IRS that authority.

When you benefit

Recurring: pricing is reviewed and documented each year, since the documentation must exist when the return is filed and needs updating when the transactions change.

What it costs

Fixed fee per study.

When you pay

Commonly a fixed fee per entity or transaction type, with part due at kickoff and the balance on delivery of the report. Updates in later years usually cost less than the first study.

Other costs

May include access to third-party comparables databases, and added fees if a tax authority questions the study.

Risks to know

If pricing can't be shown to be arm's length, the IRS can adjust income under section 482, and a penalty can apply when the adjustment is large. Documentation doesn't guarantee penalty relief on its own: it must also be reasonable and be provided to the IRS within 30 days of a request.

When risks arise

The risk sits in the return: documentation must be in place when it is filed, and the IRS may ask for it during an examination of that tax year.

The process

The provider identifies the related-party transactions and interviews the business about each entity's functions, assets and risks. It selects a pricing method, tests it against comparable data and drafts the documentation. The business reviews the conclusions and adopts them in its books and return.

Your commitment

The business provides its organization chart, a list of related-party transactions and the agreements behind them, and financial statements for each entity involved. It should also explain each entity's functions, assets and risks, since the pricing analysis rests on them.

Documents to gather

• Organization chart showing all related entities and ownership
• Intercompany agreements for sales, services, loans and licenses
• Financial statements and intercompany transaction ledgers by entity
• Prior transfer pricing studies or IRS correspondence on pricing

Helpful reading

• Transfer pricing — Internal Revenue Service
• Transfer pricing documentation best practices frequently asked questions (FAQs) — Internal Revenue Service

Further research

• 26 U.S.C. § 482 — Income allocation
• 26 CFR § 1.482-1 — Arm's length standard
• 26 CFR § 1.6662-6 — Transfer pricing penalties
• 26 U.S.C. § 6662 — Accuracy-related penalty