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A Transfer Pricing Study Puts You in the Driver’s Seat

by: Smith and Howard

June 1, 2016

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If your global company is engaged in the exchange of goods, services or intangible assets with related entities across international borders, you should be aware of the tax requirements regarding transfer pricing. The IRS has identified transfer pricing as one of the top audit issues, and you could risk incurring steep penalties of 20% – 40% on transfer pricing adjustments if you are not in compliance. A transfer pricing study could prevent that from occurring.

Background

Transfer pricing generally 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 and other government entities are concerned that companies may manipulate prices to shift profits to lower tax jurisdictions. To deter profit shifting, transfer pricing rules require related businesses to set prices that are comparable to those charged in arm’s length transactions.

Offensive Strategy: Transfer Pricing Studies

If you don’t want the IRS to tell you what that your standard should be, it’s best to determine your own transfer pricing standard by providing the IRS documentation which supports the factual relationship between your company and another entity. You should also consider the reasons for pricing methods and comparable companies you chose.

A transfer pricing study will examine your company’s intercompany business transactions in order to determine the appropriate arm’s length pricing.  There are several different methods of analysis approved by the IRS and other governments to prove what an appropriate range for arm’s length pricing should be.

Conducted by an accounting professional, a transfer pricing study can also identify opportunities for strategic tax planning that can potentially reduce costs and improve your operations. For example, you may want to consider operational structure changes to minimize worldwide tax and more efficiently repatriate cash.

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

For more information about transfer price studies and other tax-savings ideas, please contact any member of the manufacturing industry group or the distribution industry group of Smith & Howard at 404-874-6244.

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If you have any questions and would like to connect with a team member please call 404-874-6244 or contact an advisor below.

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