Transfer pricing continues to be a hot topic across the globe, and the pandemic only increases the importance for international companies to take action to understand and mitigate risks. Businesses have been challenged in 2020, straining profits where companies may be falling outside their targeted arm’s length transfer pricing ranges. It has never been more important to prepare transfer pricing documentation to be ready for the uptick in audits expected as tax authorities try to replace lost revenue. The IRS has been quiet, and its silence likely indicates that it will expect the “normal course of business,” meaning profit in the U.S.
Here are eight practical steps you can take today that address transfer pricing challenges and opportunities:
Year-End Tax Planning
- Capture the new story of your business. Quantify extraordinary expenses or declines in revenue now for 2020 transfer pricing compliance.
- Understand the new normal around transfer pricing risks and uncertainties. The impact is unique to each business, and not every industry or company is disrupted in the same way.
- Reduce risk of penalties and income adjustments by preparing an annual transfer pricing study that is current, especially for 2020.
- Review and create or strengthen intercompany legal agreements.
- Revisit location of employees that drive your business. Are key employees sheltering in place in different locations than normal, and does this impact the functions, assets, and risks of the business?
- Engage in repatriation planning to know how to access cash at all times. Consider streamlined cash flow management via a global centralized strategy.
- State tax planning for separate filing states. Consider cost allocations and arm’s length pricing under federal transfer pricing regulations, as state tax examiners are doing so.
- Most importantly, don’t panic and change your company’s transfer pricing policy without serious consideration. Companies should change their policies only if their actual business operations have changed. Otherwise, the key is to take a consistent approach with a transfer pricing strategy that works long term.