U.S. Transfer Pricing Basics

Kate Fishers, CPAInternational Tax Services

407-802-1206

2009

Why Transfer Pricing Services?

• Client Service

Our clients want/need international expertise

Globalization of the economy, technology, and society has accelerated

• Compliance

IRS (tax authorities) Increased Efforts

IRS Strategic plan 2009 - 2013

Transfer pricing definition and purpose

Prices charged by one affiliate to another, in an intercompany transaction involving the transfer of goods, services, or intangibles, must yield results that are consistent with those that would exist if uncontrolled taxpayers had engaged in the same transaction under the same circumstances.

IRS may adjust income under Sec 482 to clearly reflect income.

Transfer pricing – Why 482?

Without 482, related taxpayers could artificially shift their tax burden to more favorable taxing jurisdictions by establishing intercompany transfer prices different than the prevailing market prices

Arm’s Length Standard

• Consistent with the results realized if uncontrolled taxpayers engaged in the same transaction under the same circumstances

• But such comparables would rarely, if ever, exist

• Thus, the better references are comparable transactions under comparable circumstances

Best Method Rule

• Pricing must be determined under the method that provides the most reliable measure of an arm’s length result in the circumstances at issue, based on…– Comparability of controlled vs uncontrolled

transactions– Quality of available data– Reliability of assumptions– Sensitivity of results to deficiencies in the data or

assumptions used

Transfer pricing methods

• Regulations under Sec. 482 provide several methods of establishing transfer pricing– Comparable uncontrolled price– Resale price (tangible property)– Cost plus (tangible property)– Comparable profits– Profit split– Unspecified methods

Transfer pricing methods

Acceptable methods vary depending on transaction. For example…

• Tangible products – governed by methods listed in Treas. Reg. Sec. 1.482-3

• Royalties – governed by methods listed in Treas. Reg. Sec. 1.482-4

• Services – governed by methods listed in Treas. Reg. Sec. 1.482-9

Transfer pricing definition and purpose

Exceptions• “White list” of services

– Payroll– A/R and A/P– General admin– Corporate and public relations– Meeting coordination and travel planning– Accounting, auditing, tax– Health, safety, regulatory affairs– Budgeting

Transfer pricing definition and purpose

• “White list” of services (cont’d)– Treasury– Statistical assistance– Staffing and recruiting– Training and employee development – Benefits– Information technology services– Legal services– Insurance claims management– Purchasing

Transfer Pricing Documentation Required

Pursuant to Treas. Reg. Sec. 1.6662-6(d)(2)(iii)(B), the following items must be documented in the transfer pricing study (“Principal Documents”)…

• Business overview• Organizational structure• Method selected and explanation why• Alternative methods considered and explanation

why not used• Controlled transaction description and internal

data used to analyze them

Transfer Pricing Documentation Required

Continued…• Description of comparables use, how

comparability was evaluated, and what (if any) adjustments were made

• Explanation of economic analysis and projections used

• Description of any post-year-end data that would help determine reasonableness of method

• Index of principal documents and description of recordkeeping system for cataloging/accessing

Transfer pricing related penalties

• IRS increased scrutiny of transfer pricing - imposing two severe penalties:

– Transactional penalty (20%/40% of tax underpayment)

– Net adjustment penalty (20%/40% of tax underpayment)

– Penalty avoidance

Transfer pricing study clients

Who are our potential clients?

• Cross-border related party transactions

• U.S. parent companies w. foreign subsidiaries

• Foreign parent companies w. U.S. subsidiaries

Who spots transfer pricing issues?

• Attorneys

• CPAs

How are the issues spotted…?

• Form 5471 filed by certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations

• Form 5472 required when reportable transactions occur during the tax year of a reporting corporation with a foreign related party

• Additional penalties

Information Reporting Requirements

LarsonAllen Transfer pricing services

• Complete transfer pricing study

• Limited scope transfer pricing study

• Advanced Pricing Agreement

• Consulting (in-house preparation)

CNL Center II420 South Orange AvenueSuite 500Orlando, FL 32801Tel: 407.802.1200 Fax: 407.802.1250