Is your company subject to the laws and regulations regarding transfer pricing? A significant factor in determining income and expenses, transfer pricing directly affects the taxable income of multinational companies.
As taxing authorities throughout the world compete for their piece of the profits, they are especially interested in the transfer pricing of multinational companies that are evolving into true global enterprises.
What is transfer pricing?
Transfer pricing relates to intercompany pricing for tangible and intangible property and services transferred within a related-party group across international boundaries. You are subject to the laws and regulations of transfer pricing if you are a multinational business with cross-border intercompany transactions taxed in more than one jurisdiction with any of the following transactions:
- Sales of tangible goods
- Transfer of intangibles (know-how, trademark, licenses, etc.)
- Financial transactions (debt sharing or loans between related entities)
The financial crisis has prompted countries to devote more resources to international tax issues
The specific laws and regulations governing intercompany pricing have become a major issue for multinational companies and the taxing authorities that monitor them. With worldwide governments still dealing with the effects of the financial crisis, all countries are devoting more resources to international tax issues. Compliance with the differing requirements of multiple international tax jurisdictions has become a complicated and expensive task.
In the United States, the focus includes mid-sized and smaller companies
With continuing new IRS resources, transfer pricing has been and will continue to be a significant focus of attention for the IRS in its examination of corporations, including mid-sized and smaller companies. All companies with foreign entity related-party transactions are required to compile documentation to support intercompany transfer pricing strategies on an annual basis prior to filing U.S. income tax returns.
The arm’s length principle governs
Any transfer pricing policy needs to be broad in scope and carefully constructed to complement the business. The aim is to maximize profits distributed to subsidiaries or to the parent company while reducing potential risk.
Transfer pricing is not a tool that allows companies to simply shift profits without proper support. It is based on setting values at arm’s length, which means reflecting prices that would be reasonably agreed upon by two independent third parties in the wider market. Arriving at an accurate price generally depends on having documentation using a comparability analysis.
Maintain proper and accurate documentation
Accuracy-related penalties of up to 40% make proper and accurate documentation crucial. If a company has the required documentation when audited, the taxing authorities tend to be easier to work with than if the authorities note the lack of documentation first. In the U.S., if a company is unable to produce its documentation within 30 days, the IRS effectively uses its own methods to make adjustments.
The IRS conducts an analysis to compare conditions made or imposed between associated enterprises and independent enterprises, and calculates the profits that would have accrued to the enterprise at arm’s length.
Minimize your worldwide effective tax rate by revising your transfer pricing policy
Many companies may be missing opportunities by simply not giving transfer pricing enough attention. Even though the main reason to compile transfer pricing documentation is the threat of action by taxing authorities, revising a transfer pricing plan has other benefits. You can derive a range of advantages from maximizing your transfer pricing policy to more efficiently reduce your worldwide effective tax rate, whether or not you are subject to a tax audit.
File the required forms to avoid fines of up to $10,000 and minimize your chance of an audit
The IRS will review specific forms filed with business tax returns to determine if a company should be audited:
- Form 5471, “Information Return of U.S. Persons with Respect to Certain Foreign Corporations”
- Form 5472, “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business”
- Schedule UTP, “Uncertain Tax Position Statement”
Proper filing of these forms could prevent an audit. Failure to file could result in fines up to $10,000 per form.
Our international tax team has the necessary expertise to help document all intercompany transactions with a diagnostic review or a complete transfer pricing study. We also help you identify, develop, and implement international tax planning strategies to maximize tax savings and ensure international tax compliance. As your company expands to take advantage of international opportunities, you will need proper planning to navigate the complex international tax laws.
Contact Donna Hartman with any questions concerning this international issue at 800-236-2246 or 920-996-1182, or by e-mail at email@example.com.
Donna Hartman, CPA, tax manager, has over 20 years of public accounting experience assisting corporations, partnerships, LLCs, and individuals with income tax planning, compliance and research. She has assisted companies with proper inter-company transaction documentation and transfer pricing studies. Donna is a member of our International Tax team.