Transfer Pricing Considerations: How to Plan and Win on International Taxes
September 13, 2017
If your company conducts international transactions, you must have a solid understanding of transfer price, the amount at which U.S. companies and their related entities buy and sell to each other.
Transfer pricing considerations are important because the Internal Revenue Service and tax authorities of other countries want to tax worldwide profits as much as possible. As a business owner, of course, you want to keep your income tax as low as legally possible. Here are three things to keep in mind.
1. Rewards for Compliance
The strategic use of transfer pricing is most effective on the front end. By planning, you gain flexibility in determining where your profits are earned, and that’s one of the most powerful tools in the international tax realm. Conduct a transfer pricing analysis and research different locations; you may be able to allocate your income into more favorable jurisdictions and save on taxes.
For example, organizations in certain industries may be able to set up operations in Ireland, which has one of the lowest tax rates. If structured properly, this may allow the company to shift significant profits out of the United States and into Ireland. The company thus reduces its worldwide tax rate — paying a much lower rate on a global basis rather than the 40 percent it would pay if operations were solely in the United States.
2. The Risk of Penalties
If you fail to document your transfer pricing methods and analysis ahead of time, your company could face a drawn-out IRS examination. It might have to pay more tax and might even be subjected to double tax on the same income.
As a rule, your transfer pricing documentation has to be in place before you file your tax return for that year. If your company doesn’t have this analysis ready to present within 30 days of being requested by the IRS, you could face IRS penalties. If a taxpayer has the transfer pricing analysis completed before the IRS asks for it, the examination of transfer pricing is much less likely to result in a tax adjustment and related penalties.
3. Customs Duty
Completing your transfer pricing analysis up front also ensures that you’re paying proper customs duty, because the two figures are intertwined. In the case of a foreign parent company with a U.S. subsidiary, for example, there are customs valuation concerns if the parent sells goods to its subsidiary. Determine in advance how to value those goods for customs purposes.
Consistency between tax and customs figures is crucial. By relying on your completed transfer pricing analysis to support your customs valuations, you can avoid future penalties.
No matter your motivation, one thing is certain: Your company will save time and money by keeping transfer pricing front and center. Transfer pricing considerations can be complicated, and each case is unique, for manufacturers of tangible products and providers of services alike. Don’t wait until you hear from the IRS. Act now to ensure your financial records meet the necessary requirements.
About the Author
Robert is an international tax partner with more than 27 years of experience providing international tax solutions to publicly and privately-held corporations on an array of international tax matters, such as foreign tax credit management and utilization, structuring foreign and domestic operations, international mergers and acquisitions, and export tax incentives. He also has many years of experience serving foreign-owned U.S. businesses.