achieve financial growth
Current Trend of
IRS Transfer Pricing Practices
November 8, 2013
CPAs & Consultants
Index
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What is Transfer Pricing?
Basics of Transfer Pricing – Why is it important?
U.S. Transfer pricing rules
Common Intercompany Transactions
Transfer Pricing Disclosures & Penalties
Transfer Pricing Methods
Transfer Pricing Report
Recent Developments
Transfer Pricing Rules - Mexico
Transfer Pricing Rules - IMMEX Companies
Transfer Pricing Rules - Canada
Questions
CDH Transfer Pricing Team - Contact Information
What is Transfer Pricing?
• A “transfer price” is the price at which one company buys and sells
goods or services or shares resources with a related affiliate in its
supply chain.
• “Transfer Pricing” is the system of laws and practices used by
countries
• Aggressive transfer prices may inflate profits in low-tax jurisdictions
and depress profits in high-tax countries.
Basics of Transfer Pricing –
Why is it important?
• Compliance
• Tax planning - minimizing tax liabilities for the entire
global group
• Benchmark for business planning and profitability
• Related party transactions
• Arm’s length standard
• Section 482 - preventing tax avoidance
U.S. Transfer Pricing Rules
IRS Code Section 482
• Purpose is to ensure that taxpayers report and pay tax on their
actual share of income arising from related party transactions.
• Requirement that intercompany transactions be priced at arm’s
length.
• A taxpayer should incur the same profitability from a related party
transaction as a third party would have realized from a similar
transaction under similar circumstances.
• The taxpayer must use the “Best Method” that provides the most
reliable estimate of arm’s length price.
Common Intercompany Transactions
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Purchases of tangible property (i.e. inventory)
Sales of tangible property (sales to Parent or affiliates)
Royalties
Commissions
Management and administrative fees
Service income
Interest
Transfer Pricing Disclosures & Penalties
Disclosures to be submitted to the IRS with the tax return
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Form 5471 or
Form 5472, and
Schedule UTP (For 2012 – Equal to or over $50 million in Assets).
Penalties
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A penalty of $10,000 is imposed for each Form 5471 or Form 5472 that is filed after
the due date, including extensions, of the income tax return; e.g. 3 related companies
– 3 forms, if not filed the penalty will be $30,000.
When the tax authority requests a taxpayer’s transfer pricing documentation, the
taxpayer has 30 days to submit documentation.
Potential penalties of 20%-40% if result is underpayment of tax.
There is no penalty for failure to provide documentation, but documentation may help
to avoid a penalty.
IRS has three years from the tax return filing date to make adjustments.
Transfer Pricing Methods
There is no hierarchy of “best methods” prescribed by the IRS.
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For Tangible property transactions, the most common methods used are:
– Comparable Profits Method (CPM, equivalent to OECD’s Transactional
Net Margin Method ‘TNMM’) and
– Cost Plus Method
For Intangible property transactions, the most common method is:
– Comparable Uncontrolled Transaction Method (CUT)
For Services transactions, most common methods used are:
– Cost of Services Plus Method and
– CPM
Transfer Pricing Report
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Functional Analysis
Related Party Transactions
Industry Analysis
Economic Analysis
Appendices
Recent Developments
• The APA (Advance Pricing Agreement) program shifted to an office
under a new Transfer Pricing Director.
• New Advance Pricing and Mutual Agreement (APMA) Program
created in March 2012.
• IRS is doubling the total number of Transfer Pricing staff in 2012.
• Intangibles and Value Creation.
• High Risk Transactions – Management Fees and Head Office
Expenses
• Movement towards Master File Approach
Transfer Pricing Rules - Mexico
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Governed by the Servicio de Administracion Tributaria (SAT)
Annual filings required
Documentation of related party transactions must be prepared by income
tax return filing due date.
Documentation must be in Spanish
Foreign comparables (US Companies) are acceptable to SAT
Statute of limitations on assessment for transfer pricing adjustments is five
years from the date of filing the income tax return.
Penalties of 40% of tax deficiency apply if paid before notice of deficiency
issued, 55-75% in other cases.
Advance Pricing Agreements are available
Similar transfer pricing methods like the U.S., however CUP is preferred.
Transfer Pricing Rules
of IMMEX Companies
IMMEX Companies may comply with transfer pricing rules mainly under two
alternatives:
1. Prepare a transfer pricing study based on a cost plus method, and adding
an amount equal to 1% of all the M&E provided by the foreign related
parties and used by the IMMEX Company, or
2. The Safe Harbor Method, pursuant to which the IMMEX Company must
generate a tax profit equal to the greater of 6.9% of the value of assets used
in their activity or 6.5% of the amount of ordinary costs and expenses of
their operation.
Transfer Pricing Rules - Canada
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Governed by the Canada Revenue Agency (CRA)
Canada generally follows the OECD Transfer Pricing Guidelines for
Multinational Enterprises & Tax Administrations (July 2010)
Form T106 must be filed if total reportable transactions for all nonresidents
combined exceeds Canadian $1,000,000.
Documentation contemporaneous with transactions is required to avoid a
potential transfer pricing penalty and must be prepared by income tax return
filing due date.
Penalty of 10 percent of the total transfer pricing adjustment may be
imposed if adjustment exceeds a threshold.
Foreign comparables are acceptable to the CRA
Advance Pricing Agreements are available
Any questions?
CDH Contact Information
For more information, please contact:
• Koh Fujimoto, Principal
voice 630.285.0215 ext. 8229
kfujimoto@cdhcpa.com
• Daniel Duncan, Principal
voice 630.285.0215 ext. 8227
dduncan@cdhcpa.com
• Yoko Yamamoto, Manager
voice 630.285.0215 ext. 8262
yyamamoto@cdhcpa.com
• Seeta Khanna, Transfer Pricing Consultant
voice 630.285.0215 ext. 8234
skhanna@cdhcpa.com