As the Internal Revenue Service (IRS) increases its monitoring and investigation of foreign transactions, as well as increasing the number of companies being audited, certain practices are becoming increasingly scrutinized. One of these practices is transfer pricing, which relates to transactions between related entities, such as a parent company and a subsidiary. The transfer price is the amount that is charged in an intercompany transaction for goods or services.
There are significant tax implications because of the consolidated financial position of a controlled foreign entity and its domestic parent company. However, each entity remains separate for tax purposes, leading to potential issues. Transfer pricing is especially high-risk for multi-national companies. This is because of the potential use of asset transfer across country borders and income shifting in order to take advantage of tax benefits. It is critical to ensure compliance with applicable laws in order to avoid serious penalties.
In order to be compliant with the IRS regulations relating to transfer pricing, it is necessary to identify the value that is created in the transfer. Then it is crucial to place an economic value on the transferred item based on an evaluation method that is approved by the Treasury department.The transaction must meet the arm’s length standard, in that the transfer price was one that would have been reached if the entities involved in the transaction were not related. These provisions also are applicable to services that may have been performed between related companies across national lines.
These transfer pricing matters often have serious tax implications for the foreign corporation and the related party involved in the transfer.When the transfer pricing has resulted in an uncertain tax position, it is necessary to report the transfer on an Uncertain Tax Position Statement, Schedule UTP.
When engaging in any activities involving transfer pricing, it is crucial to have qualified legal advice about the tax implications of the transaction, which is what companies find at Brunoro Law. Take advantage of a one-hour free consultation, either in the San Diego office, on the telephone, or via video conferencing, to learn how Brunoro Law can assist your company.