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Current Trend of IRS Transfer Pricing Practices November 8, 2013. Index . What is Transfer Pricing? Basics of Transfer Pricing – Why is it important ? U.S. Transfer pricing rules Common Intercompany Transactions Transfer Pricing Disclosures & Penalties Transfer Pricing Methods
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A “transfer price” is the price at which one company buys and sells goods or services or shares resources with a related affiliate in its supply chain.
“Transfer Pricing” is the system of laws and practices used by countries
Aggressive transfer prices may inflate profits in low-tax jurisdictions and depress profits in high-tax countries.
IRS Code Section 482
Purpose is to ensure that taxpayers report and pay tax on their actual share of income arising from related party transactions.
Requirement that intercompany transactions be priced at arm’s length.
A taxpayer should incur the same profitability from a related party transaction as a third party would have realized from a similar transaction under similar circumstances.
The taxpayer must use the “Best Method” that provides the most reliable estimate of arm’s length price.
Disclosures to be submitted to the IRS with the tax return
Form 5471 or
Form 5472, and
Schedule UTP (For 2012 – Equal to or over $50 million in Assets).
A penalty of $10,000 is imposed for each Form 5471 or Form 5472 that is filed after the due date, including extensions, of the income tax return; e.g. 3 related companies – 3 forms, if not filed the penalty will be $30,000.
When the tax authority requests a taxpayer’s transfer pricing documentation, the taxpayer has 30 days to submit documentation.
Potential penalties of 20%-40% if result is underpayment of tax.
There is no penalty for failure to provide documentation, but documentation may help to avoid a penalty.
IRS has three years from the tax return filing date to make adjustments.
There is no hierarchy of “best methods” prescribed by the IRS.
For Tangible property transactions, the most common methods used are:
Comparable Profits Method (CPM, equivalent to OECD’s Transactional Net Margin Method ‘TNMM’) and
Cost Plus Method
For Intangible property transactions, the most common method is:
Comparable Uncontrolled Transaction Method (CUT)
For Services transactions, most common methods used are:
Cost of Services Plus Method and
IMMEX Companies may comply with transfer pricing rules mainly under two alternatives:
For more information, please contact:
voice 630.285.0215 ext. 8229
voice 630.285.0215 ext. firstname.lastname@example.org
voice 630.285.0215 ext. 8262
voice 630.285.0215 ext. email@example.com