Who Else in Tax Wants to Learn About Transfer Pricing?
I have never worked in an area of corporate tax that required me to know very much about transfer pricing. However, I do know it is a hot topic among tax professionals in corporate tax departments, particularly multinationals. So, several weeks ago at the Vertex Exchange corporate tax conference in Vegas, I decided to attend Basic Transfer Pricing Concepts, presented by George Salis, Principal Sr. Tax Compliance Analyst, at Vertex, so I could learn more. To my surprise, the class was very well attended by tax professionals who had either recently found transfer pricing part of their daily corporate tax responsibilities, seen their companies go through acquisitions that now made them multi-nationals, or experienced turnover and assumed new responsibilities. George did an excellent job of breaking down the transfer pricing fundamentals with a blend of formal definitions and personal insight.
Here, I just want to share with tax professionals some of the highlights from George’s presentation, so other tax pros out there in the same boat can benefit.
- What is transfer pricing? – Pricing of goods and services when transferred within related multi-divisional companies, across borders. It also segregates the divisional cost and profits within a multi-divisional organization.
- What are the key global transfer pricing regulations & guidelines?
- Section 482 IRC
- OECD Model Treaty – Article 9
- Local country code and regulations
- What kind of inter-company transfers do transfer pricing regulations apply to?
- Tangible property transfers & sales
- Intangible property transfers & use (intellectual property)
- Loans & certain like-kind exchanges
- Other global inter-company transactions
- What is the arm’s length standard? – An inter-company transaction must be consistent with results between non-related third parties. Economic analysis must be done to see how unrelated parties might structure a particular relationship.
- What are government concerns around transfer pricing?
- Shifting of income from high to low or no tax jurisdictions through affiliated entities,
- Tax avoidance resulting in lost revenue. It’s all about getting their fair share of tax!
- How do corporations benefit from transfer pricing?
- Minimize global taxes and effective tax rate
- Optimize cash repatriation
- Generate foreign source income to use
- Foreign tax credits
- Use of expiring tax attributes (NOLs, FTCs)
- Which countries have aggressive enforcement? – There are a significant number of countries that have exceedingly high penalties regarding documentation, misstatements, and high audit and assessment activities, including the US. Mexico, Canada and the UK are getting very aggressive. Documentation is necessary to avoid/minimize penalties.
- What is the US audit environment like around transfer pricing? – US Competent Authority (argue on a company’s behalf when there is a double taxation issue across borders) case load is the highest on record. Transfers of intangible property have become a Tier 1 audit issue for the IRS.
Obviously tax professionals who deal with this every day understand this is an intricate area of tax and an ongoing compliance problem for multinational corporations. For the newbies out there eager to get their feet wet, hopefully this has provided some valuable basic information.
Are you new to transfer pricing within the corporate tax department? What kind of information do you think would be helpful to understand about the area? Please share your thoughts in the comments below.