Compliance happens during the year
Prices between related companies are easier to defend when they are set before the transactions occur and then checked against actual results. Many groups test results near year end and book an adjustment to bring a company's profit into the targeted range, and those adjustments need written support and a consistent method. New activities, such as an employee seconded abroad, shared software, or an affiliate guaranteeing a loan, can create intercompany transactions that need a price even if no invoice was ever issued. Transfer pricing compliance also means the intercompany agreements describe what actually happens, and that changes in the business are reflected in them. Waiting until the tax return is due tends to leave gaps that are harder to explain later.
Related-party reporting and customs value
US corporations with significant foreign ownership, and certain foreign-owned single-member LLCs, generally must report transactions with related foreign parties on an information return, and penalties can apply to missing or incomplete filings. Large multinational groups may also have country-by-country reporting obligations. Goods imported from an affiliate raise a separate question: the customs value declared to US Customs and Border Protection usually depends on the transfer price, so a year-end adjustment that raises the price may affect duties already paid. Some importers use reconciliation or similar procedures to account for later adjustments. Keeping tax and customs positions aligned prevents one agency from seeing a figure that contradicts what the other was told.
Reviewing an existing program
Bring the current intercompany agreements, the most recent transfer pricing study, the related-party information returns, and a list of all transactions between affiliates, including those without invoices. We usually start by comparing the agreements with the actual flows of goods, services, money, and people to find transactions that are unpriced or priced on outdated terms. We also check whether the documentation would be ready if the IRS requested it, and whether foreign affiliates' own filings tell the same story. The result is a schedule of what needs updating and in what order, from routine agreement revisions to items that may warrant correcting past filings. Some fixes work better going forward, while others call for a decision about earlier years.
