All signs lead to the clear message that transfer pricing continues to be a focus area in the international community. Multinational companies of all sizes – from public giants to middle markets to smaller family-owned business – need to take steps to ensure they are in a position of strength in this area. With increased scrutiny on cross border transactions, having a consistent global strategy that reflects the economic substance of the overall business and is compliant with regulations in all countries, goes a long way to stay off the radar of the world’s tax authorities.
Transfer pricing – in both the global and domestic arenas – is not only about compliance but is a key planning tool as well. This includes applying transfer pricing alongside considerations unique to each business such optimal tax efficiencies, streamlined cashflow management, minimizing transfer pricing audit risk, and protecting intellectual property.
Current Transfer Pricing Environment
In the current tax environment, it is more important than ever for taxpayers to take a proactive approach to their global transfer pricing strategy, and make sure they are operating as efficiently as possible. 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. Taxpayers should also consider following the “substance over form” doctrine while avoiding indefinite accrual of intercompany revenue/expenses.
The signing of the Inflation Reduction Act in the U.S. is another clear indication that the IRS will continue to be focused on transfer pricing scrutiny in the coming years, among other increasing enforcement activities. 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. Remember, transfer pricing is not just about the transfer of products/tangible goods but also includes accounting for services, intercompany financing, intangible valuation and their license, cost allocations, amongst other things.
No longer restricted to just being an international business consideration, more and more U.S. state tax auditors are jumping in on the action, primarily driven by revenue shortfalls starting in the height of covid. 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. Every international company that is a potential acquisition target should ensure they are transaction ready; this involves understanding the location of their intellectual property and protecting it from other tax authorities via smart transfer pricing strategies that reflect the true economic substance of their business. Once the diligence begins, target companies should feel confident that they have the optimal global strategy in place, and that there is consistency in 3 key areas: the transfer pricing study, the intercompany legal agreements, and the accounting/financials.
2022 Year-End Tax Planning Resources
Withum’s Year-End Tax Planning Resource Center is a one-stop-shop for annual tax planning tips for individuals and businesses, legislative and regulatory changes, COVID impacts and other tax-saving opportunities.
8 Steps to Address Transfer Pricing Challenges and Opportunities:
Are they current and reflective of your business? Are you minimizing transfer pricing risk around the world?
This 2-phased approach ensures we have the most tax efficient global structure, supported by transfer pricing.
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.
IP strategies make clear which entity is the IP owner/funder/developer vs the service provider or licensee.
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.
Review and update or create them. It is important to add this substance to support your arm’s length transactions between affiliates.
Transfer pricing is a very hot topic in the transaction space, where buyers targeting global businesses are far more informed on the need to understand transfer pricing. It is important to get the right people into the right room at the right time, and as early as possible, ideally before a transaction even begins. Taking proactive steps ensures that uncertain transfer pricing does not impact the purchase price or delay the deal.
For many businesses, international expansion is a natural step along the growth curve as new markets create additional revenue opportunities—but it is certainly not without its fair share of challenges. There are many issues to consider and plan for, and while operational and commercial issues can occupy management’s attention, the global tax and transfer pricing implications that come with a decision to go global need to be prioritized.
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.