Transfer Pricing Insights
For some companies, the decision to prepare a transfer pricing study comes down to cost.
Management may ask: Why spend money documenting something if we haven’t been audited?
It’s a reasonable question – but it looks different when the potential cost of transfer pricing controversy is considered.
What Does a Transfer Pricing Study Cost?
Depending on complexity, scope, number of transactions, entities, jurisdictions, and other factors, a transfer pricing study may sometimes fall in an approximate $15,000 to $35,000 range.
More complex engagements can cost more, while limited-scope projects may differ significantly.
The appropriate comparison isn’t simply study vs. no study. It’s proactive compliance vs. the potential financial and administrative cost of addressing the issue after it attracts scrutiny.
The Potential Cost of an Audit
A transfer pricing audit can require substantial management time.
Finance and tax teams may need to locate agreements, explain historical pricing decisions, provide financial data, reconcile intercompany accounts, and respond to detailed information requests.
External accountants, transfer pricing specialists, and legal counsel may also become involved. That means the cost isn’t limited to a potential tax adjustment.
Penalties Can Add to the Exposure
Transfer pricing adjustments can potentially result in additional tax and applicable penalties.
Contemporaneous documentation may also play an important role in penalty protection, depending on the circumstances and applicable requirements.
A study therefore can serve two purposes: supporting the company’s pricing methodology and creating documentation of the analysis behind it.
Then There’s Double Taxation
Suppose a tax authority increases the income attributed to one entity.
Unless a corresponding adjustment is obtained elsewhere, the same economic income may effectively be taxed in two jurisdictions. Resolving these disputes can require additional procedures and professional assistance.
The Hidden Cost: Management Time
Audits consume something CFOs can’t easily replace: time.
Hours spent gathering historical documents, explaining transactions, meeting with advisors, and responding to tax authorities are hours not spent operating the business.
Compare the Costs Before There’s a Problem
A proactive transfer pricing study cannot guarantee that an audit won’t occur.
What it can do is help the company understand its position, identify potential issues, and maintain documentation before questions arise.
For companies with significant cross-border related-party transactions, that can make the upfront cost easier to evaluate.
