There are several different factors which affect transfer pricing strategies and selection of the specific method which provides the greatest procedural and tax advantage while meeting the guidelines of the IRS and other sovereign tax agencies. Each situation is unique and the selection of the most appropriate and applicable transfer pricing method requires extensive analysis from the perspective of multiple disciplines: tax, legal, accounting and the realities of business and how to most effectively support the affiliated corporate structure.
There are five primary OECD (Organisation for Economic Co-operation and Development) methods of establishing transfer pricing between affiliated entities:
- Cost Plus
- Resale Price
- “CUP” or Comparable Uncontrolled Price
- “TNMM” or Transactional Net Margin Method
- Profit Split
Each method within established transfer pricing strategies and selection criteria has advantages and disadvantages and while there is no longer a hierarchy within these methods if a “CUP” exists it should usually be applied. The Comparable Uncontrolled Price basically requires the price of the transfer to be based upon an “arm’s length” perspective, as if there was no affiliation between the parties. In a “controlled” situation – where the seller and the buyer are owned by affiliated interests – the price can be manipulated to reduce taxable events and increase the “basis” in a product or service to reduce the impact of tax when that product or service or resulting integrated products are taken to market. Therefore, the price in the transaction must be based upon the price charged for products or services when they are exchanged between independent or unaffiliated entities. While CUP appears on the surface to be a straight forward method for determining the transfer price, one must be able to meet stringent comparable pricing benchmarks. The IRS or another sovereign tax agency may reject the CUP method as it may not fulfill one or more of the criteria established in the OECD guidelines such as the position in the supply chain, volume or a comparison to a “similar” market.
Allen Barron is uniquely positioned to provide sound counsel and informed guidance on these issues. Our integrated tax, legal, accounting and business advisory services ensures the answers you receive are based upon the higher perspective of the transaction’s impact on both of the associated entities as well as your overall constellation of entities. We analyze these questions based upon the stringent OECD guidelines, IRS impact and other international and domestic tax aspects as well. We integrate the accounting controls and business practices necessary to capture critical transactional information as well as the legal issues such as associated contracts and title issues. If you are concerned with transfer pricing strategies and selection of the appropriate method to maximize profit and minimize tax exposure we invite you to contact us or call 866-631-3470 for a free consultation.
