It’s been another intense year for transfer pricing, and the expectation is that it will continue. Once an obscure area of International Tax law, transfer pricing is going mainstream and making front page news. It’s more important than ever for MNEs to take a proactive approach to their global transfer pricing strategy, to make sure they are operating as efficiently as possible around the globe. This includes applying transfer pricing alongside considerations specific to each business such optimal tax efficiencies, streamlined cashflow management, minimizing transfer pricing audit risk, and protecting intellectual property.
While the impact of the pandemic lingers on some businesses, global governments and policy makers turn up the heat on a global minimum tax rate, setting their sights on eliminating base erosion profit shifting and the “race to the bottom” low tax jurisdictions, and taking a unified approach to taxing the digital economy. It has never been more important for companies to carefully consider – or reconsider – related party transactions and proactively plan transfer pricing strategies that best fit the current environment. These changes have given transfer pricing strategies a place in the spotlight and require MNEs to carefully document their business and transfer pricing positions, especially regarding intangibles.
Once only a global consideration, U.S. state tax auditors are jumping in on the action, driven by revenue shortfalls. Transfer pricing also has a seat at the transaction advisory table now, as buyers become more in tune with the risks around uncertain transfer pricing positions around the world for their global acquisition targets.
While it has been a hot topic for many years, transfer pricing is now on fire. Global transparency, new regulations, increased scrutiny, and tax authority litigation are at an all-time high. It’s more critical than ever that MNEs document their transfer pricing and tell the story of their business so they are in the best negotiating position in an audit.
Here are six practical steps you can take today that address transfer pricing challenges and opportunities:
- Health assessment of your transfer pricing practices and policies. Are they current and reflective of your business? Are you minimizing transfer pricing risk around the world?
- Global Tax and Transfer Pricing Strategy. This 2-phased approach ensures we have the most tax efficient global structure, supported by transfer pricing.
- Annual transfer pricing compliance contemporaneous to your tax return filing. There is no better way to be in the best negotiating position in an audit situation. Plus, takes the 20% or 40% of penalties for income adjustments off the table, so a valuable insurance policy.
- Protect your most prized possession, the intellectual property associated with your global business. IP strategies make clear which entity is the IP owner/funder/developer vs the service provider or licensee.
- Domestic tax planning opportunities and planning. Consider cost allocations and arm’s length pricing in the domestic arena to allocate HQ costs throughout the various entities and protect against single filing state tax bills.
- Intercompany legal agreements. Review and update or create them. It’s important to add this substance to support your arm’s length transactions between affiliates.
No action should be taken without advice from a member of Withum’s International Tax Services Team because tax law changes frequently, which can have a significant impact on your specific planning possibilities. Reach out to discuss your individual situation as year-end approaches.
Year-End Tax Planning