The IRS and the US Treasury have issued temporary guidelines that affect the taxation of individuals and corporations who move goods and services between associated entities. Transfer pricing is generally defined as the price established for services or goods that are sold from one associated entity to another. For example, a foreign manufacturing subsidiary sells a widget to the parent company in the US for distribution. The price the parent pays for the widget is known as the “transfer price”. The transfer price must be at fair market price, to preserve an appropriate valuation or basis associated with the transfer of the product or service between corporate entities. These transactions must be conducted at “arm’s length” and account for all of the actual value that is being transferred from one associated entity to the other.
The IRS and US Treasury expressed concern that many individuals and corporations were attempting to hide income or that “certain results reported by taxpayers reflect an asserted form or character of the parties’ arrangement that involves an incomplete assessment of relevant functions, resources, and risks and an inappropriately narrow analysis of the scope of the transfer pricing rules.”
In other words, the parties are manipulating the transfer price in a way that does not meet established IRS guidelines. If the actual value of the widget in our example was $10 to the foreign entity, and they “transferred” it to the parent company for $100, and the parent company sells it for $150, the gross taxible profit is $50 ($150 sales price less the basis of $100 established by the transfer), compared to the $140 actual difference between the genuine value of the product when manufactured and the price for which it sold in the US.
Transfer pricing is a strategy that concerns the IRS because it shields actual profit from taxation. The new guidelines and recent court cases against Microsoft and Coke send two strong signals:
1. The IRS is changing (tightening) the rules around transfer pricing, and
2. The IRS is carefully reviewing and auditing any return that contains issues relating to transfer pricing
The experienced tax attorneys and accounting experts at Allen Barron have extensive expertise in foreign transactions and multi-national corporate transfers. The ability of the IRS to follow the numbers around the globe (due to FATCA) and the resulting impact on US businesses has brought new challenges to companies who transfer goods and services between associated companies around the globe.
If you would like additional information we invite you to call us for a complimentary and substantial consultation at 866-631-3470.