Develop a transfer pricing policy to help manage risk and identify tax savings opportunities.
When audited, having the appropriate transfer pricing documentation in place before the audit begins is critical.
Work closely with advisors to understand compliance implications wherever your company operates.
U.S. companies owned by a foreign parent often face the challenge of understanding U.S. transfer pricing rules, which require testing transactions to assess whether existing transfer pricing policies are followed. By prioritizing your transfer pricing policy, your company can manage the greatest areas of risk that a potential audit might bring.
Many multinational companies with U.S. operations are reassessing their transfer pricing policies and structures following the enactment of the Tax Cuts and Jobs Act (TCJA), which was signed into law in 2017. Most notably, TCJA permanently reduced the corporate tax rate from 35% to 21%.
As part of building an efficient U.S. tax structure, it is critical for newly established foreign-owned U.S. companies to create transfer pricing policies that bridge the gap between the increasing burdens of managing compliance and the need to reasonably manage costs.
Transfer pricing studies serve as your first line of defense
Unlike other countries, the United States does not have a minimum threshold for when to disclose intercompany transactions. Companies must disclose the total amount of all cross-border transactions when their income tax return is filed.
In addition to this disclosure requirement, U.S. regulations call for transfer pricing documentation to be kept on a “contemporaneous basis” and made available to the Internal Revenue Service (IRS) upon its request. To adhere to these regulations, U.S. companies should conduct a periodic study to ascertain if intercompany transactions are priced for compliance applying an arm’s length standard, which the IRS uses to evaluate controlled transactions. A transfer pricing study also tests if pricing methods are appropriate under U.S. transfer pricing regulations (Treasury Regulation § 1.482).
The IRS has recently focused on increasing the size and training capabilities of its transfer pricing compliance practice. As a result, U.S. companies with foreign intercompany transactions should focus on their transfer pricing practices to prepare for the heightened risk that could result from a potential audit.
A transfer pricing study could serve as your first and best line of defense against an IRS audit, and would shift the burden of proof for non-compliance to the IRS and other tax authorities. If transfer pricing audit adjustments are assessed by the IRS, having a transfer pricing study could also provide penalty relief.
How we can help
Being better equipped for transfer pricing scrutiny could help improve compliance and, importantly, arm you with information to build a tax structure that better aligns with your global business goals.
CLA has experience with all aspects of transfer pricing policy planning, implementation, and documentation. Whether it’s assessing the risk of a transfer pricing audit or helping maintain compliance on arm’s length transactions, we can help. As part of Nexia International, an international advisory network, we work closely with affiliates worldwide who understand both the U.S. and international transfer pricing requirements.
The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment, or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit CLAconnect.com.
Bea Petkova and Ed Morris