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Transfer pricing continues to be one of the most important matters facing multinational companies. The tax situation in any given country can affect whether or not your business sets up facilities or holds intellectual property ownership there. The IRS and numerous tax authorities worldwide are intensifying their focus on how corporations allocate income and expenses among related entities abroad because of the potential to shift income inappropriately to lower tax jurisdictions.
In order to satisfy the IRS and other tax authorities, transfer pricing must generally meet an “arm’s length” standard. In other words, the prices charged in an inter-company transaction must yield results that are similar to what would have occurred if two unrelated parties had engaged in the same transaction under the same circumstances.
Despite the increased scrutiny of transfer pricing, with careful planning there may be opportunities to minimize both your company’s tax liability and your audit exposure. Here are five considerations:
The IRS has stated that the transfer of intangibles offshore is one of its biggest audit priorities. “The issue spans all industries but controversy is most prevalent in the high technology industry,” the tax agency stated.
Let’s say your U.S.-based company transfers patents, or other intangibles, to an overseas subsidiary. A fair market price or buy-in payment must be paid by the foreign subsidiary to the U.S. parent company. According to the IRS, disputes with taxpayers involving buy-in payments involve issues including:
Much of today’s global economy revolves around intangible assets, which are inherently difficult to value. Given their increasing importance and the scrutiny of tax authorities worldwide, companies need a strategy to defend their transfer pricing methods.
They include a way (the “Services Cost Method”) for your company to value at cost back office, low-margin services, which are not integral to the business. These services include payroll, accounts payable, accounts receivable, general administrative, staffing, training and more.
Assess your company’s cross border services with related entities to ensure they comply with the rules.
Examine how transfer pricing calculations and the allocation of your company’s income and expenses could affect the Section 199 deduction. By planning ahead, you can take full advantage of this tax break.
The details are complex. In addition, special exceptions and other rules may apply to your business. Contact us for more information on international tax and transfer pricing, by emailing us at firstname.lastname@example.org.