Transfer pricing is the price that is charged between related business entities for goods and services. The transactions may include financial transactions, transfers of intellectual property, services, tangible goods, or loans. For example, a U.S. corporation purchases widgets from its foreign subsidiary, the price the U.S. corporation pays its foreign subsidiary for the widgets is the transfer price.
Transfer pricing provisions require that the price charged between related parties is at “arm’s length.” Basically, the price has to be comparable to similar transactions between unrelated business entities.
Due to the explosion of international trade, the opening of numerous developing economies, and tax advantaged jurisdictions, transfer pricing has had an increased impact on corporate taxation. In an effort to achieve higher profits and reduce competition, many multinational businesses have misused transfer pricing by misusing the arm’s-length principle in order to shift profits to low-tax jurisdictions.
Because the IRS frowns on these business practices, they have become more aggressive in transfer pricing enforcement. The IRS has introduced stricter penalties, new documentation requirements, increased information exchange, and increased the number of audit staff. You need to have solid transfer pricing policies in place if you are involved in transfer pricing transactions.
Esquire Group will review your current transfer pricing arrangements, if any, to identify potential areas of exposure. We will then help you develop proper transfer pricing policies so you don’t inadvertently misstep transfer pricing rules. We will ensure you are following the “arm’s length” principle and correct any policies not in compliance with the transfer pricing rules.