Get Ready for IRS to Enforce Stricter Transfer Pricing Rules
The IRS plans to aggressively pursue offshore tax avoidance, which is often hidden in transfer pricing deals. Cracking down on rising tax evasion schemes is a top priority, according to the
IRS Strategic Plan for 2009 through 2013 and IRS Commissioner Doug Shulman’s letter to the Organization for Economic Co-Operation and Development (OECD).
The agency finished auditing public companies and is turning its attention toward privately held companies. Based on international legislative proposals published by the Obama administration earlier in 2009, 800 IRS employees will be hired to continue conducting transfer pricing audits.
To support the methodology behind these related party transactions, companies involved in transfer pricing must follow the strict tax laws and guidelines. Noncompliance may result in severe penalties.
What is transfer pricing?
Transfer pricing is the pricing of goods, services, and/or intangibles between related parties located in different international tax jurisdictions. There are many kinds of transfer pricing transactions. A few examples include sales related to party distributors and manufacturers and management services to related party subsidiaries.
The purpose of a transfer pricing agreement is to document the methodology used to determine the transfer price, which is governed by the Internal Revenue Code (IRC): Sections 482 (Allocation of Income and Deductions) and 6662 (Imposition of Accuracy-Related Penalty on Underpayments).
How to prepare for the tax reporting and documentation requirements
As a first step, review your operations to determine if your company is subject to transfer pricing rules.
“The establishment of related party transaction pricing is complex, and there’s not a best method to apply to all transfer pricing arrangements. Companies can avoid noncompliance by analyzing and documenting each related party transaction prior to filing income tax returns,” urges Kate Fishers, an international tax principal with LarsonAllen.
She recommends working with a CPA to discuss whether your company has satisfied the documentation rules. “Keep in mind, the IRS requires contemporaneous records to adequately satisfy the governing requirements.”
Any company that files a return on related party transactions could get audited. “The IRS doesn’t have to look for the companies involved in transfer pricing arrangements, because tax filings deliver that information on a silver platter,” explains Fishers.
Consequences for noncompliance
Failing to have the required documentation in place may expose companies to substantial penalties. The IRS plans to assess penalties if taxpayers have made significant adjustments to the transfer pricing.
How we can help
There is no single solution for all transfer pricing arrangements. How to handle each transaction depends on the taxpayer’s unique circumstances. To speak with someone about analyzing your
multinational tax strategies or complying with global tax reporting and documentation requirements, contact Kate Fishers at
kfishers@larsonallen.com, or 407-802-1206, or an
international principal in your region.
Helpful IRS resources