Many companies face higher transfer pricing audit risks in developing countries when a transaction is less contentious in a developed country’s jurisdiction.ģ. Given the differences in transfer pricing audit thresholds on a global basis, companies must be pragmatic when addressing TP compliance requirements for each country. A start-up company generating $1 million in revenue in Mexico could be required to prepare the same type of transfer pricing documentation reports as a company 100 times larger. Mexico and India, on the other hand, have very low thresholds for requiring TP compliance documents. has an exemption from TP audits for small- and medium-sized enterprises. While governments reference the OECD Transfer Pricing Guidelines when reviewing inter-company pricing arrangements, compliance thresholds vary substantially by country. Most countries subscribe to the Organization for Economic Co-Operation and Development (OECD) Transfer Pricing Guidelines when enforcing transfer pricing laws. Fortunately, the arm’s-length principle applies worldwide. In other words, companies should charge the same prices to related parties as they would charge to unrelated companies. The “arm’s-length standard” is the core principle for countries enforcing transfer pricing regulations. This is essential for proper tax planning. Management must ensure that their tax position in one country does not contradict their tax position in another jurisdiction. They must consider the transfer pricing (TP) requirements of more than one tax authority. Companies must take this into account when setting intercompany prices. Can You Keep Multiple Tax Authorities Happy?Ĭross-border transfer prices involve multiple countries. The following example provides a calculation of a $10 million IRS TP adjustment and resulting costs to the business.Ģ. They would not receive an automatic refund for taxes that were overpaid. If this is the case, the company would owe substantial federal and state tax, interest, and potential non-deductible penalties. The IRS may determine that transfer pricing is incorrect. Transfer Pricing audits are widely considered a high return on resource investment for governments needing tax revenue to fund services. The resulting audit leads to unexpected tax bills. A tax auditor may disagree with a taxpayer’s assessment of the value drivers of a global business. Why? Transfer prices drive how much income tax a multinational corporation pays in each country. Tax authorities are increasingly aggressively questioning whether multinational companies underpay tax through incorrect TP practices. Over 100 countries can issue tax adjustments for companies that shift profits offshore through incorrect transfer prices. Why are Multinational Companies Concerned about Transfer Pricing?Ĭompanies risk substantial additional taxes, interest, penalties, and double taxation if they do not charge arm’s-length prices. Companies that struggle with TP may be surprised by how this issue affects stakeholders across an organization. This can be done through a strategic approach to transfer pricing. Many multinational companies can reduce their global effective tax rates, tax risks, and improve their cash flow. These rules impact the taxes payable and cash flow within global operations. Transfer pricing laws and regulations govern the pricing of goods, services, royalties, loans, and other transactions between related companies. Multinational companies should understand the implications of cross-border pricing policies. Employee Retention Credits Tax Insightsīy Alex Martin | Principal, KBKG Transfer pricing (TP) is far more than ‘just another tax compliance issue.’.R&D Tax Credit for Software Development.R&D Tax Credits & the IRS: How to Prepare for Audit.Intro to Cost Segregation & the Impacts of Tax Reform.Cost Segregation Software Tools & Tax Strategies.Research & Development (R&D) Tax Credit.
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