Transfer pricing for global structures…is your company prepared?

Did you know that the IRS is increasing scrutiny around transfer pricing?

Transfer pricing is the method used to set a price for goods and services sold between related legal entities within a business structure. For example, if a foreign subsidiary sells goods to its parent company, the cost of those goods is the transfer price.

Transfer pricing policies are especially important when it comes to global structures. Although the provisions restrict arbitrary profit assignments, transactions can be structured within the context of the rules to be as tax efficient as possible. Transactions with foreign related parties must be at an arm’s length rate supported by an appropriate method and documentation.

Transfer pricing penalties are stiff and can sometimes be significant. Penalties for failure to set appropriate pricing can be 20-40 percent of incremental tax due. It’s important to remember that proper documentation must be in place before the tax return is filed to reduce exposure. In general, proper documentation would include all intercompany transactions as well as details and method descriptions that support the pricing used in those intercompany transactions.

The IRS and similar authorities in other countries are strictly enforcing having an appropriate price (and appropriate documentation) for intercompany transactions. Companies should review their intercompany transactions and policies related to pricing every year to minimize risk and exposure.