If you own or control a multi-national corporation it is important that you entrust an experienced and seasoned tax attorney with the task of evaluating your transfer pricing and the impact it will have on profitability pre-tax and post-tax. A “transfer price” is the cost of goods sold from one related company to another during an inter-company transfer. For example, a manufacturer off-shore “sells” or transfers a finished product to its US affiliate for sale here. While the inter-company transfer may or may not have an impact on the company’s financial reports, it will definitely raise tax issues with the IRS. Transfer pricing has become one of the highest (and most profitable) audit targets for the IRS, and multi-national business owners should give the matter thorough research to ensure maximum profitability while protecting themselves from contingent liabilities with the IRS.
While this is a complex issue requiring deep analysis, the basic standard applied to such transactions is known as “arms-length”. Inter-company or “controlled” transactions generally meet the arms-length standard if the income generated by the transaction is determined to be consistent with the income that would have come out of a deal between unrelated entities in similar circumstances. It is important to note that transfer pricing applies to services as well as physical products or inventory.