How sound is your transfer pricing strategy?

A company’s transfer pricing strategy should include, among other things, the determination of prices for goods and services exchanged between two or more related entities. Typically, these parties are subsidiaries owned by a single parent corporation.

The ability to set pricing offers significant tax advantages if done correctly. One benefit to multinational corporations is the use of transfer pricing as a way to allocate profits among their various subsidiaries. However,  questions from tax authorities can arise when the price setting is not carried out properly or where profits are shifted from a high-tax jurisdiction to a lower tax jurisdiction.

The arm’s length principle

Transfer pricing laws and guidelines seek to ensure the fairness of transactions between related parties by enforcing what’s known as the “arm’s length principle,” which provides that transactions between related entities should be treated as if between independent entities, that is, negotiated at arm’s length.

The principle provides a single international tax computation standard, enabling relevant governments to collect their share of taxes while also protecting the parent corporation from double taxation.

Transfer pricing documentation

Companies that implement transfer pricing strategies must ensure that the documentation substantiating the implemented strategies is prepared before their tax return is filed. The documentation should explain, among other things, that transfer prices were determined in accordance with a reasonable method under IRC §482.

Taxpayers may be requested by the IRS to provide sufficient and “contemporaneous” transfer pricing documentation and may be subject to penalties where the requested documentation is not provided to the IRS within 30 days of the request.

First steps in developing a transfer pricing strategy

Here are some questions to consider as your company develops or revises its transfer pricing strategy:

1. Does your company have related foreign entities and/or operations in another country (either directly, through a permanent establishment or branch)? 
2. Do the related entities have any of the following intercompany transactions?
   • Transfer of goods?
   • Usage or joint development of tangible assets?
   • Provision of services, including but not limited to, financial, distribution, marketing, administrative or support services?
3. Do intercompany transactions occur with entities located in low-tax jurisdictions or tax haven countries? 
4. Do intercompany transactions produce frequent losses in a single tax jurisdiction?
5. Has your corporate group experienced a restructuring?
6. For transactions between related entities, is there an intercompany agreement in place? 
7. Have transfer pricing policies been established and documented? If so, is there a transfer pricing method in place? 
8. Has a benchmark study been performed on related-party transactions? If so, is it up to date? 
9. With respect to the company’s filed US tax returns, has information been disclosed on Schedule M, Form 5471? 

How Wipfli can help

We understand the complex tax implications of operating across borders, and our extensive experience and technical knowledge can help support your plans for growth. Wipfli specialists can review your current transfer pricing methods to be sure they are sound and audit-ready, as well as help you develop a new transfer pricing strategy and analyze your tax liability and risk.

Our solutions include advising on transactions between related entities, developing transfer pricing policies, preparing transfer pricing documentation tailored to local requirements and providing dispute resolution support. Learn more about our international expansion services.