Five reasons multinational enterprises should review their transfer pricing positions!
Transfer pricing is governed under Internal Revenue Code Sections 482 and 6662, making it mandatory for all taxpayers with controlled transactions to maintain contemporaneous transfer pricing documentation. Complying with these guidelines can help ensure unnecessary penalties are avoided in the event of an adjustment by the Internal Revenue Service.
2. ALIGNING TRANSFER PRICING POLICIES WITH BUSINESS OPERATIONS
Transfer pricing regulations are based on the principle of value created. For example, income should be taxed where profits are generated, or value is otherwise created. Within the supply chain of transaction, multinational enterprises (‘MNEs’) should attribute profits to each entity based on individual contributions.
3. INSULATING AGAINST TRANSFER PRICING AUDIT RISK
In the past decade, transfer pricing audits by tax authorities have increased significantly worldwide. Further, it is expected that the tax authorities will continue to invest additional resources into the transfer pricing examination of cross-border transactions. Therefore, it is important for MNEs to not only ensure that their intercompany transactions and transfer pricing methodologies are documented, but also to review the transfer pricing positions regularly to ensure compliance with the transfer pricing regulations and avoid litigation.
4. TRANSFER PRICING AS A PLANNING AND ASSESSING TOOL
While transfer pricing compliance is widely regarded as an exercise, it is also an important tool for planning and assessing intercompany transactions. Performing transfer pricing health checks ensure potential risks are uncovered and addressed prior to transfer pricing scrutiny. Reviewing transfer pricing positions can also help predict potential questions from tax authorities, allowing you to identify red flags well in advance.
5. ELIMINATE DOUBLE TAXATION
Transfer pricing analyses not only provide opportunities to enhance profitability by better aligning an MNE’s operating model with its global tax objectives, but it may also eliminate the potential for double taxation. Unilateral adjustments by tax authorities in one country may lead to double taxation, whereas transfer pricing analyses consider the regulations of both recipient and provider jurisdiction, thereby reducing potential exposure.