Transfer Pricing

In an increasingly global marketplace, businesses need expert advice to help them navigate complicated tax matters. The opportunities before you also can present major tax issues. DKC Tax International can give you the edge against your competition in uncharted waters.

A challenge in corporate taxation
Transfer pricing, the practice within companies for setting a price on goods, services and property when moving them between related U.S. and foreign entities, is a prime example. U.S. and foreign tax authorities view transfer pricing as an area of widespread abuse by multinational companies. IRS Commissioner Mark Everson says transfer pricing is under review, as “one of the most significant challenges for us in the area of corporate tax administration.”

The largest tax settlement in U.S. history
In September 2006, a historic settlement was announced. The multi-billion dollar case settled by drug giant GlaxoSmithKline highlights the extent to which the IRS is willing to provide both human and financial resources to transfer pricing issues. The IRS asserted that Glaxo artificially reduced its U.S. profit and paid less U.S. taxes by overpaying its British parent for drugs. In this case, Glaxo agreed to pay $3.4 billion in the largest tax settlement in IRS history. The case involved “issues about where value is created,” essentially the core matter with transfer pricing, according to Glaxo lawyer John Mcgee.

Glaxo settled the case before it went to trial in U.S. Tax Court, knowing that the company would have owed upwards of $14 billion in taxes if the IRS had prevailed in court.

The IRS is increasingly using their authority whenever they believe that transfer pricing could be an audit issue. Indeed, transfer pricing is a major factor in the IRS audit selection process. Companies are increasingly focusing on transfer pricing as they spend more time and resources to support their policies as the IRS ramps up its requests for documentation. At the joint opening conference for each audit cycle, the IRS has the authority to request a copy of any transfer pricing documentation prepared by the taxpayer pursuant to Section 6662(e). The taxpayer has 30 days in which to respond or penalties are assessed.

A solution with certainty
A bilateral agreement between the U.S. and one or more national tax authorities is one way to gain certainty with the IRS regarding transfer pricing. Known as an Advance Pricing Agreement (APA), these agreements can take more than two years to complete and usually cover three to five years. They also can cost small businesses from $22,500 to $50,000 for multiple transactions with several countries.

Taxpayers who have a written transfer pricing report are protected from the assessment of penalties, but not from additional taxes imposed on the related transactions. Both China and India are developing unilateral transfer pricing rules that could provide limited protection.

Another consideration
In addition, the application of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes- an Interpretation of FASB Statement 109” (FIN 48) concepts to transfer pricing must be reviewed for years after December 15, 2006. The scope of FIN 48 applies to all income tax positions. Companies should evaluate processes used to differentiate highly certain and uncertain positions. Transfer pricing is generally not considered a highly certain tax position under FIN 48. A company must fully provide tax if there is less than a 50% likelihood that the benefit will be realized and understand that transactions may be examined.

You choose the direction… We’ll help you get there!
DKC Tax International can aid your accounting or tax staff with transfer pricing documentation. We can prepare or review reports and assist you in complying with FIN 48. If you do not have the necessary staff to meet the transfer pricing requirements, we can provide the expert resources needed for these and other international tax services.