Avoid IRS Scrutiny of Your Cross-Border Transactions

Posted on Aug 30, 2016

Is your global company up to date on the latest IRS transfer pricing requirements? If it participates in the international exchange of goods, services, or intangible assets with related entities, it should be. The IRS has identified transfer pricing as one of its most prominent audit issues – and other revenue-strapped tax authorities are following suit. The good news is that you can mitigate the risk of potentially steep penalties of 20% – 40% on transfer pricing adjustments through proper documentation and implementation. A well-documented transfer pricing study will allow you to make that happen, proactively.

Background

Transfer pricing restrictions aren’t limited to international transactions.—they also apply to domestic companies that do business across state lines with related parties. Transfer pricing typically refers to the prices for which related parties, such as a U.S. corporation and its foreign subsidiary, exchange goods, services or intangible assets in cross-border transactions.

The IRS is concerned that companies will manipulate intercompany prices to shift profits and lower tax jurisdictions. To deter tax avoidance, transfer pricing rules require related businesses to set prices that are comparable to those charged in arm’s-length transactions using one of several accepted methods.

Offensive Strategy: Transfer Pricing Studies

To avoid having the IRS tell you what your standard should be, it’s best to determine your own transfer pricing standards. You can do this by providing the IRS documentation that affirms the factual relationship between your company and another entity. The documentation also allows you to provide your reasons for pricing methods and comparable companies you chose.

A transfer pricing study examines the pricing of intercompany transactions between related parties and analyzes whether the transactions were conducted at arm’s-length. It also contemplates whether the transactions were conducted in a manner that will withstand scrutiny from the IRS and other tax authorities. In other words, IRS regulations employ the testing method that provides the most reliable measure of an arm’s-length result, as it relates to the facts and circumstances of the controlled transaction under review. A study will ensure you are adopting the correct testing.

When conducted by an accounting professional, a transfer pricing study can also identify opportunities for strategic tax planning. These opportunities can reduce costs and improve your operations. For example, you may want to consider operational structure changes to minimize worldwide tax and promote more efficient cash repatriation and cash utilization structures.  For example, intercompany loans, subject to an arm’s length interest rate, can be used to move cash across various jurisdictions.

By taking strategic steps now, you are far more likely to avoid tax surprises down the road.

© 2016 Clark Nuber PS All Rights Reserved

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This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.

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