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Avoid IRS Scrutiny of Your Cross-Border Transactions

By MarksNelson on June 4, 2018 in Articles, International Tax, Sara Stubler CPA
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Transfer Pricing Studies Offer Proactive Tax Planning

Are you up to date with the latest IRS requirements regarding transfer pricing? If your global company participates in the exchange of goods, services or intangible assets with related entities across the border, you should be. The IRS has identified transfer pricing as one of its top audit issues, and the same holds true for other revenue-strapped tax authorities. Don’t put your company at risk for incurring steep penalties of 20% – 40% on transfer pricing adjustments by not being in compliance. A transfer pricing study will allow you to proactively avoid that from occurring.

Background

Did you know that transfer pricing restrictions aren’t limited to international transactions?—They also apply to domestic companies that do business with related parties across state lines. Transfer pricing generally refers to the prices for which related parties, such as a U.S. corporation and its foreign subsidiary, exchange goods, services or intangible assets in cross-border transactions.

The IRS is concerned that companies will manipulate prices to shift profits to lower tax jurisdictions. To deter tax avoidance, transfer pricing rules require related businesses to set prices that are comparable to those charged in arms-length transactions using one of the several accepted methods.

Offensive Strategy: Transfer Pricing Studies

If you don’t want the IRS to tell you what your standard should be, it’s best to determine your own transfer standard by providing the IRS documentation which supports the factual relationship between your company and another entity and the reasons for pricing methods and comparable companies you chose.

By examining the pricing of controlled transactions between related parties, a transfer pricing study will help determine whether the transactions were conducted at arms-length in a manner which will withstand scrutiny from the IRS and other tax authorities. In other words, IRS regulations specify using the testing method that provides the most reliable measure of an arms-length result under the facts and circumstances of the controlled transaction under review. A study will help ensure you are adopting the correct testing.

Conducted by an accounting professional, a transfer pricing study can also identify opportunities for strategic tax planning that can potentially reduce costs and improve your operations. For example, you may want to consider operational structure changes to minimize worldwide tax and more efficient cash repatriation

By taking strategic steps now, you are far more likely to avoid tax surprises down the road.

For more information about international tax strategies, contact Sara Stubler in our International Tax Department at 816-743-7700.

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Sara Stubler

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