Why intercompany prices get questioned
Tax authorities expect related companies to deal with each other on terms that unrelated parties would accept, which is usually called the arm's length standard. The IRS has authority to reallocate income between commonly controlled businesses when their pricing does not reflect that standard, and foreign tax authorities apply similar rules from their side. Transfer pricing questions come up most often with goods sold between affiliates, management or service fees, royalties for technology or trademarks, and intercompany loans. A US distributor that reports losses year after year while the group as a whole is profitable tends to draw attention. Because two countries look at the same transaction, an adjustment in one country can leave the same income taxed twice unless relief is obtained.
Choosing a method and staying consistent
There is rarely a single correct price, and the rules allow several methods, such as comparing with similar deals between unrelated parties or testing whether a company's profit falls within a range earned by comparable businesses. Which method fits depends on which company performs the important functions, owns valuable intangibles, and bears the risks. Written intercompany agreements matter, but tax authorities also look at what the companies actually do, so a contract that describes one arrangement while the business runs another can undercut the position. Prices for imported goods also affect customs value, and the IRS and US Customs and Border Protection may view the same price from opposite directions. Keeping the tax, customs, and accounting teams working from the same figures avoids conflicting positions.
Planning ahead and relieving double taxation
Bring the group's ownership chart, intercompany agreements, recent financial statements for the US entity, and any transfer pricing studies prepared here or abroad. We look at where the current pricing is most exposed and whether the existing documentation supports it. For recurring transactions of significant value, some companies seek an advance pricing agreement, negotiated with the IRS and sometimes with a treaty partner at the same time. When an adjustment has already been made, a tax treaty may allow the two governments to work through a mutual agreement procedure to relieve double taxation. Which path makes sense depends on the amounts involved, the countries, and how much certainty the business needs.
