By Mike Green, CPA
Transfer Pricing--these are two words one should be familiar with if involved with intercompany transactions with subsidiaries. Over the last few years, transfer pricing has become much more scrutinized by the IRS and tax authorities worldwide. The Internal Revenue Service has stepped up scrutiny towards transfer pricing pursuant to Internal Revenue Code section 482. The regulations under section 482 provide a wide array of methods for pricing transactions to related parties for tangibles, intangibles and services. These regulations have undergone changes in the past few years. One of the most important regulations deals with how intercompany services can be charged to related entities.
Assume, for example, a U.S. company performs accounting services for one of their wholly-owned subsidiaries in Ireland. Under the old transfer pricing laws, the company was to charge the Irish subsidiary an arms length price for these services. The IRS felt time was wasted examining these common types of back-office services and changed the regulations to simplify the rules for these transactions and to allow more time for complex and substantial transfer pricing examinations. Therefore in October of 2006 the new Services Cost Method for services was released. This basically allows a company to charge related entities for common back office services at cost. Of course, the IRS disallows certain types of services that contribute to the competitive advantage of the company in addition to specific ones mentioned in the regulations. However for services that are eligible it greatly reduces the uncertainty of pricing these services.
One can imagine the complexities of transfer pricing of transactions between multiple foreign jurisdictions. Transfer pricing laws differ from country to country which could add additional headaches. It is now more important than ever to have proper transfer pricing policies in place to not only satisfy the requirements of the United States but those of all countries in which one operates. If not, transfer pricing examinations could result in substantial penalties.
About Joseph Decosimo and Company, PLLC
Decosimo has significant experience with international business affairs and has committed a team of professionals to work in this area exclusively. From transfer pricing to captive insurance design, Decosimo provides a full range of advisory services for both international companies conducting business in the United States and domestic companies conducting business abroad.
The nationally recognized Decosimo CPA firm provides a full range of Assurance, Litigation Support and Corporate Finance, as well as international and domestic Tax services to public and private corporations. Decosimo is a leading regional CPA firm with nearly 250 professionals and staff. The firm has offices in Chattanooga, Knoxville, Memphis and Nashville, Tenn.; Atlanta and Dalton, Ga.; Cincinnati, Ohio; and the Cayman Islands.