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October 27, 2016 Article 1 min read
If you’re planning to expand across borders, here’s a quick primer on transfer pricing — two words you’ll soon become much more familiar with.

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The United States shares a common interest with other countries in making sure that businesses pay tax on the income generated from operations in their countries. Taxing authorities of these countries often use transfer pricing to identify and allocate income of multinational businesses to their jurisdictions.

What is transfer pricing?

Transfer pricing analyzes cross-border transactions among affiliates to confirm that income is properly reported in each country. Generally, transfer pricing applies whenever a business takes a product in one country and moves it to an affiliate in another country, either for sale or continued processing. The same rules apply when businesses:

  • Transfer technology, know-how, or other intangible assets, like trademarks, to affiliates in other countries
  • Receive or provide intercompany services

Sales between third parties that cross borders will presumably be priced at arm’s length by market forces, but the same assumptions can’t be applied to transactions between affiliates. As a result, a business that operates internationally must have an up-to-date policy that’s managed proactively throughout the year.

If you operate internationally or plan to, transfer pricing should be top of mind. It helps businesses anticipate and solve tax problems before they arise.

However, even the best policies can still result in challenges from the countries in which a business operates. It’s not unusual for two different countries to examine the same intercompany transaction and reach different conclusions about how it should be treated. Adjustments in other countries may also result in amended U.S. returns and, if needed, updates to the business’s transfer pricing policy.

If your business operates internationally or is planning to go international, transfer pricing should be top of mind. It allows a business to anticipate and solve international tax problems before they arise and provides insights on the tax impact of growth activities outside of the United States. Plan ahead to avoid expensive, time-consuming tax examinations and unanticipated tax liabilities, both in the United States and abroad.