United States: Transfer Pricing: Why You Should Care

Last Updated: August 16 2016
Article by Cristina Morera

In an era of globalization and continued growth of international trade, inter-company pricing has become an everyday necessity for many businesses. But why has transfer pricing become such a hot tax issue?

Transfer prices (prices charged between related parties) directly affect the allocation of groupwide taxable income (and therefore taxes) across national tax jurisdictions. From a multinational company's perspective, transfer pricing can help an organization to identify opportunities for business optimization. It can influence cash flow streams (e.g. less corporate tax imposed by the tax authorities will increase the resources at hand), investment decisions (e.g. a jurisdiction with frequent changes of the transfer pricing legislation may bring uncertainty, leading to a decision to exit a country) and key performance indicators (e.g. less corporate tax increases the profitability a company could offer to its shareholders). This opportunity to shift income from one jurisdiction to the other is however viewed as a threat by the tax authorities worldwide; no country – poor, emerging or wealthy – wants its tax base to suffer because of transfer pricing.

The Organisation for Economic Co-operation and Development ("OECD"), a key player in the area of international taxation, notes that transfer pricing is not an exact science. This represents a window of opportunity for tax authorities to impose transfer pricing adjustments and recalculation of taxes to be paid. This, together with fiscal shortfalls, has encouraged governments to identify transfer pricing as a soft target with the potential to produce large tax revenues.

In the US, Section 482 of the Internal Revenue Code gives the IRS the authority to adjust taxable income between two related parties to more accurately reflect the income earned by each party. Ever since the IRS settled a landmark case in 2006 in which GlaxoSmithKline Holdings Inc. agreed to pay $3.4 billion to resolve the largest tax dispute in the history of the IRS at that time, the IRS has continuously increased its enforcement efforts. In September 2015, the Large Business & International ("LB&I") division was reorganized to include the Treaty and Transfer Pricing Operations Practice Area to address transfer pricing issues. The IRS has recently hired economists to expand its enforcement team. Amazon, AOL, Adobe, Hewlett-Packard, Microsoft, and other multinationals have made headlines because of transfer pricing disputes, with income adjustments ranging from tens of millions to upward of a billion dollars.

However, the tentacles of transfer pricing are not designed exclusively to reach large multinational companies. In fact, the IRS is now expanding its scope to include mid-sized and smaller companies. Late last year, acting director of the IRS's transfer pricing group David Varley noted that this initiative includes middle-market foreign-owned businesses, foreign parent companies that operate limited-risk distributors in the U.S., and entities based in the U.S. with assets that range between $10 million and $250 million.

Although it has not been officially announced, the IRS has shared informally that even small taxpayers with less than $25 million in revenue might be targets, because agents are finding easy adjustments with utterly unprepared companies.

Thus, even what may appear to be a harmless intercompany management fee, if not adequately priced/documented, may attract the attention of the tax authorities who could challenge the amount of the fee or even its deductibility. The significant penalties and interest on overdue tax that follow, potentially in addition to double taxation (where income has already been taxed elsewhere), make transfer pricing a risk worth managing.

Unfortunately, this topic is barely on small and mid-sized company leadership's radar, but when it comes to transfer pricing, ignorance is not bliss. Failure to act could cost hundreds of thousands of dollars in legal fees. Surveys of small and midsized enterprises suggest that a transfer pricing dispute could cost between $250,000 and $499,999.1

For most global companies, the question is not if they will get audited, but when. As such, financial executives should focus their attention on mitigating transfer pricing related risks where and when possible. But what can you do?

In the transfer pricing arena, proactivity is key. The most popular and cost efficient way a multinational company can alleviate transfer pricing risks is to obtain a transfer pricing study reviewed by each jurisdiction it is designed to cover.

A transfer pricing study is an in-depth review of the company's pricing policies and related documentation. It is usually conducted by a third party provider and it can produce a number of benefits including:

  • Reducing taxes and penalties by ensuring that the company's transfer pricing policies comply with all requirements in the local jurisdiction, including meeting local documentation rules;
  • Providing support for recording no tax liabilities for tax exposures in the company's financial statements pursuant to FIN 48;
  • Identifying opportunities to reduce the company's global effective tax rate by restructuring multinational operations; and
  • Identifying ways to increase global supply chain efficiency by relocating operations or reorganizing legal entities.

Transfer pricing is certainly subject to challenge. However, if properly approached and documented, results generally stand up to audit.

Footnote

1. Habif, Arogeti & Wynne, LLP's (HA&W) transfer pricing survey of small and mid-tier manufacturers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions