Transfer Pricing Insights
Transfer pricing problems rarely appear overnight. More often, issues accumulate until an audit, tax provision, transaction, or year-end review brings them to management’s attention.
Here are seven signs that your company’s Transfer Pricing compliance may deserve a closer look.
1. Your Company Has a Foreign Parent
Foreign-owned U.S. subsidiaries commonly conduct transactions with their parent companies and other entities within the global group. Those transactions can create U.S. transfer pricing considerations.
The fact that headquarters establishes the company’s global pricing policy does not eliminate the need to evaluate compliance from the U.S. entity’s perspective as well.
2. You Engage in Significant Related-Party Transactions
Does the U.S. company sell or purchase inventory, components, equipment, or services to / from an overseas affiliate? If so, those prices can directly affect U.S. profitability.
U.S. taxable income can be significantly impacted when the majority of an entity’s sales or purchases are controlled transactions.
3. The U.S. Subsidiary Regularly Reports Losses
One loss year isn’t necessarily alarming. Repeated losses are different.
If a U.S. subsidiary performs routine functions but consistently loses money while related entities remain profitable, tax authorities may question whether the intercompany pricing appropriately reflects the subsidiary’s activities and risks.
4. You’re Establishing a New U.S. Entity
The best time to address transfer pricing is before intercompany transactions begin.
A new U.S. entity gives the organization an opportunity to establish appropriate pricing policies, responsibilities, documentation, and intercompany agreements from the beginning.
5. The Company’s Ownership Has Changed
Acquisitions and restructurings can change intercompany relationships. New management may inherit transfer pricing policies without understanding how they were developed. Transactions can also change following an acquisition.
A change in ownership is therefore a good time to reassess the company’s transfer pricing framework.
6. Your Company Has Licensing Arrangements
Royalties involving trademarks, technology, patents, know-how, or other intellectual property can create significant transfer pricing considerations.
Companies should understand what is being licensed, which entity owns or contributes to the relevant intangible, and how the payment was determined.
7. There Are No Intercompany Agreements
This is one of the easiest warning signs to identify.
If money regularly moves between related companies but there are no written agreements describing those transactions, the company’s documentation may not reflect how the business actually operates.
What Should You Do?
Finding one of these warning signs doesn’t automatically mean the company’s pricing is incorrect. It means management should ask questions.
A Transfer Pricing Study or targeted review can help determine whether existing arrangements are supportable, whether documentation needs improvement, and whether a potential Transfer Pricing Audit risk should be addressed proactively.
