transfer Pricing
U.S. transfer pricing regulations are designed to prevent taxpayers from manipulating their U.S. tax liabilities through prices charged for transactions between related parties resident in different tax jurisdictions. An “arm’s length price” is required for a transaction between related parties. That is, the prices charged between related parties must be the same or similar to prices that would be charged between unrelated parties in the same or similar circumstances.
The transfer pricing rules apply to all types of business transactions made between related parties. This includes sale of goods, performance of services, use of intangible property, interest rates on loans, and cost-sharing arrangements between the home office and the U.S. operations. Typically, the transfer pricing rules will apply in a similar manner regardless of whether the U.S. operations are performed directly by the foreign corporation or indirectly through a domestic subsidiary.
The income attributable to U.S. operations must reflect all of the functions and activities performed in the United States, intangibles employed and risks assumed by U.S. operations and the contributions U.S. operations make to global intangible assets. This may involve setting prices for the transfer of goods and the provision of services between the parties, royalty charges for the use of intangible assets, setting interest rates on loans, and entering into cost-sharing arrangements for the development and maintenance of group intangibles.
Development of a supportable transfer pricing policy is a complicated task. The first step involves economic analysis to identify the functions and activities performed, the risk assumed, the intangibles employed and the contributions made by each party. The next step involves the choice of appropriate methodology and the identification and collection of comparable data on transactions between unrelated parties. The third step includes the application of the chosen methodology to the comparable data and the documentation of the methodology. Finally, ongoing monitoring is required to assure that the methodology continues to reflect changes in the economic and operating environment.
Transfer pricing is too often ignored or addressed superficially because of the complexity and cost associated with proper implementation. Transfer pricing is an important issue that must be addressed to properly manage a company’s tax risk and to take advantage of opportunities to minimize global tax liabilities. Transfer pricing adjustments made by the tax authorities in the United States tend to result in large tax deficiencies and are often accompanied by significant penalties. Furthermore, the divergence of corporate tax rates between the United States and its major trading partners over recent years has provided increasing opportunities to reduce a company’s global tax cost through the proper implementation of a transfer pricing strategy with regard to U.S. transactions.
The transfer pricing rules apply to all types of business transactions made between related parties. This includes sale of goods, performance of services, use of intangible property, interest rates on loans, and cost-sharing arrangements between the home office and the U.S. operations. Typically, the transfer pricing rules will apply in a similar manner regardless of whether the U.S. operations are performed directly by the foreign corporation or indirectly through a domestic subsidiary.
The income attributable to U.S. operations must reflect all of the functions and activities performed in the United States, intangibles employed and risks assumed by U.S. operations and the contributions U.S. operations make to global intangible assets. This may involve setting prices for the transfer of goods and the provision of services between the parties, royalty charges for the use of intangible assets, setting interest rates on loans, and entering into cost-sharing arrangements for the development and maintenance of group intangibles.
Development of a supportable transfer pricing policy is a complicated task. The first step involves economic analysis to identify the functions and activities performed, the risk assumed, the intangibles employed and the contributions made by each party. The next step involves the choice of appropriate methodology and the identification and collection of comparable data on transactions between unrelated parties. The third step includes the application of the chosen methodology to the comparable data and the documentation of the methodology. Finally, ongoing monitoring is required to assure that the methodology continues to reflect changes in the economic and operating environment.
Transfer pricing is too often ignored or addressed superficially because of the complexity and cost associated with proper implementation. Transfer pricing is an important issue that must be addressed to properly manage a company’s tax risk and to take advantage of opportunities to minimize global tax liabilities. Transfer pricing adjustments made by the tax authorities in the United States tend to result in large tax deficiencies and are often accompanied by significant penalties. Furthermore, the divergence of corporate tax rates between the United States and its major trading partners over recent years has provided increasing opportunities to reduce a company’s global tax cost through the proper implementation of a transfer pricing strategy with regard to U.S. transactions.