As the biggest tax uncertainty for global businesses, transfer pricing continues to be a hot topic around the world.
There is ever-increasing scrutiny on cross-border transactions in both the U.S. as well as rest-of-world markets so navigating this complex area should be proactive, not left to chance. Establishing a consistent global strategy that reflects the economic substance of the overall business and is compliant with transfer pricing regulations in all countries, puts taxpayers in a position of strength. Multinationals of any size should take action to control the narrative, to tell the story of their global business and set expectations for the world tax authorities in terms of profit (or loss) expectations in each market, depending on their relative local contribution to the overall business.
A strategic, proactive approach to transfer pricing is critical. In both the global as well as the domestic arenas, it is about planning and compliance. Planning for transfer pricing that supports the unique aspects of the business and leaderships priorities, including optimal tax efficiencies, streamlined cashflow management, minimized transfer pricing audit risk, and protection of intellectual property. Taxpayers need to be diligent in their compliance, ensuring preparation of robust transfer pricing documentation annually. In addition, the contemporaneous documentation study must align with both the intercompany legal agreements and the substance of the accounting/financial statements.
Transfer pricing is not only related to the transfer of products/tangible goods. It is also about accounting for intercompany services provided between entities, intercompany financing, and licensing of marketing and technology intangibles. Along with determining the arm’s length pricing, or profit element, companies need to analyze and make assumptions about how their costs are allocated in a quantifiable manner between entities. While transfer pricing is typically at the federal level consideration, state tax auditors are jumping in on the domestic action as well.
Understanding complex and diverse transfer pricing regulations around the world can feel daunting, but Withum can help break it all down and prioritize your company’s efforts. There are also practical steps to take today to understand your position and where the challenges or opportunities may be. We present the top 5 things you can do to easily assess/improve your current transfer pricing position.
5 Practical Actions to Take Today to Improve Your Transfer Pricing Health
Let Withum look at where you are today and advise you on your risk levels. If we discover areas of concern or opportunities, we will help you take a practical approach in prioritizing your limited time and budget to address.
Often, transfer pricing is too locally focused, and the bigger global picture gets missed. Withum can help you ensure you have a consistent global strategy and understand the thresholds in each country in which you operate to comply with all TP regulations. Also, organizations like the OECD and websites are dedicated to collecting this information.
We get it, no one is excited about annual compliance. There is no better way to smooth an audit process (tax authority or financial audit) and move the focus away from transfer pricing than to present an annual TP compliance report. Not to mention the 100% protection from penalties that could be 20% or 40% of the proposed income adjustment.
These three things always match. It starts with the TP benchmarking analysis and report to establish arm’s length – market rate – pricing. Then create journal entries, the substance of how the business operates. Settle the intercompany accounts, rather than accrue indefinitely. Intercompany legal agreements will then support the activity between entities.
Check description of transactions, entity names, transfer pricing used, and the date… all these things should be updated regularly. No need to sign new agreements every year, but if dated, it’s time to refresh and re-sign to support the independent relationship.
2024 Year-End Tax Planning Resources
Now’s the time to review your year-end tax planning options and strategies for the 2024 tax season. Withum’s Year-End Tax Planning Resource Center offers tips, legislative updates, and tax-saving opportunities for individuals and businesses.
Contact Us
Reach out to Withum’s Global Transfer Pricing Services Team for guidance as year-end approaches.
Disclaimer: No action should be taken without advice from a member of Withum’s Tax Services Team because tax law changes frequently, which can have a significant impact on this guide and your specific planning possibilities.
