If you are an international business with revenue-generating activity overseas, then you probably have all this take place within a separate foreign company. In this case, the IRS mandates that any material transactions between your US company and the foreign entity should have an appropriate transfer price. Anything which hits the income statement and is eliminated on a consolidation is fair game, and the playing field can get complicated very quickly when you start looking at management fees, allocation of intangibles, and the requirements of the foreign entity’s local government.
A simple example is a direct inventory sale from the foreign entity to the US office; the transfer price in this case is the price that will be charged by the foreign entity. The IRS is very interested in transactions like this because it would be a simple matter for a business to, say, charge a few million dollars for a sale of pencils in order to divert income overseas.
The IRS has greatly stepped up their efforts to catch such behavior and has instructed its agents to ask for transfer pricing documentation at the outset of every engagement, and to be very aggressive in reading between the lines in applying their logic in order to refute your attestations. If an agent calculates a material adjustment to your taxable income and it exceeds a certain threshold, you will automatically be liable for very severe penalties. As a result, small businesses with international operations are much more likely to be audited than in previous years, namely because these penalties are so attractive for agents to pursue. Furthermore, if an agent determines that the accounting department was aware that it was gaming the system, everyone involved can expect to be charged with transfer pricing fraud.
A transfer pricing study acts to protect your business from all of the unpleasantries associated with a transfer pricing audit. It is highly recommended to have one done if your business has international transactions. Unfortunately, most small to mid size accounting firms do not offer this service and your small business is left at the mercy of the large firms and their outrageous rates. It is possible to do a study in-house, however it requires that you have access to professionals that understand every aspect of the preparation process and know what the IRS will expect to see.
The owner of Eckemoff LLC has had access to advanced training in transfer pricing and has participated at all levels of in-house preparation. We can help you understand all of the requirements and put together your study to the point at which it is ready for a CPA firm to review; a much more affordable and accessible option than to hire them to write it from the ground up. Furthermore, we can help you get your books in line with the results of the transfer pricing study and help you avoid having a Subpart F issue down the road.