Overview
The U.S. taxation regulatory framework for transfer pricing is guided largely by Section 482 of the Internal Revenue Code.
- “The purpose of §482 is to ensure that taxpayers clearly reflect income attributable to controlled transactions, and to prevent the avoidance of taxes with respect to such transactions” by placing “a controlled taxpayer on a tax parity with an uncontrolled taxpayer by determining the true taxable income of the controlled taxpayer.”1
Experience and Application
Applied Economics has been engaged to perform a variety of transfer pricing related engagements including:
- Economic analysis support for clients facing challenges from the United States and international taxing authorities;
- Tangible property intercompany purchasing arrangements;
- Technology transfers and cost sharing arrangements;
- Determination of the transfer prices for re-engineered supply chain structures;
- Application of cost allocation methodologies for head office expenses;
- Design and implementation of contract manufacturing structures;
- Implementation of royalty structures; and
- Development of coordinated transfer pricing policies and procedures for compliance purposes in numerous jurisdictions.
Our transfer pricing practice includes domestic and multi-national clients. Many of our clients are U.S. subsidiaries of foreign-owned corporations with corporate headquarters located in South America, Europe and Asia.
Documentation Requirements
U.S. law requires that taxpayers document their U.S. transfer pricing policies including economics analyses contemporaneously with the year for which intercompany transactions have occurred. Failure to do so could result in the imposition of significant penalties if the IRS were to sustain adjustments to taxable income. This has placed a burden on multinational entities to determine arm’s length pricing estimates, which includes performing a rigorous analysis under the regulations of each tax jurisdiction.
Under the Sarbanes-Oxley Act of 2002, your accounting firm is prohibited from performing certain engagements for its audit clients, including transfer pricing analyses. This has resulted in public and certain private companies turning to independent firms, such as Applied Economics, to assist them with their transfer pricing needs.
Our transfer pricing professionals can assist you in all phases of transfer pricing planning and in avoiding costly defense actions. We can work with you to develop an effective, integrated global strategy for managing the many complex issues involved with moving goods, services and other intangibles across borders.
Penalties & Risks
In recent years, the IRS has undertaken a significant transfer pricing compliance initiative to ensure multi-national enterprises are following the proper procedures to establish transfer prices for cross-border exchanges. The compliance initiative involves a review of current practices in the examination of transfer pricing issues and in the imposition of transfer pricing penalties under §6662(e).
In the U.S. , the penalty arising from a §482 tax adjustment can be significant. There are two ways for a penalty to attach to a §482 adjustment. The first, called a “transactional penalty,” arises when the IRS determines that the price for specific property or services claimed on the return deviates significantly from the arm’s length price. The second type of penalty, referred to as a “net-adjustment penalty,” is raised when the cumulative net tax adjustments made under §482 exceed a stated minimum dollar amount or percentage of gross receipts. For either type of penalty, there are two degrees of valuation misstatement, each with its own penalty rate.
- A substantial valuation misstatement imposes a 20% addition-to-tax penalty on the portion of the underpayment of tax attributable to the valuation misstatement. This occurs when the price for any property or service is more than 200% or less than 50% of the correct price (under a transactional penalty) or when the net §482 adjustments exceed the lesser of $5 million or 10% of the taxpayer’s gross receipts (under a net adjustment penalty).
- A gross valuation misstatement imposes a 40% penalty when the price for any property or service is more than 400% or less than 25% of the correct price, or when the net §482 adjustments exceed the lesser of $20 million or 20% of the taxpayer’s gross receipts.
1. Treas. Reg. §1.482-1(a)(1).
