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A Better Path to Navigate Transfer Pricing, Part 1

The challenge becomes how to determine the profit earned in any given jurisdiction and how to protect the company from aggressive taxing authorities who challenge set prices.

By DAVID SLEMMER, Director of International Tax Practice, & ALAN WOLFSON, CPA, Partner & Director of the Manufacturing & Distribution Industry Practice, J.H. Cohn



David Slemmer, J.H. Cohn 

One of the more vexing issues facing modern businesses is the fact that most companies, both large and small, operate in multiple tax jurisdictions. 21st century managers are in constant contact with customers, suppliers, and business partners in any state throughout the United States and in any country around the world.

As a result, a company of any size can find itself operating a multistate or multinational business. Products fabricated or purchased in one jurisdiction may be stored in another jurisdiction and sold to customers in a third jurisdiction. Any business may enter into a partnership, joint venture or cost-sharing arrangement with allies in other states or countries. Support functions, such as accounting, marketing or R&D may be located in one place, but provide services throughout the organization.

The challenge becomes how to determine the amount of profit earned in any given jurisdiction and how to protect the company from aggressive taxing authorities who, after the fact, challenge the prices set for the sale of goods or the providing of services between related business units.

Benefits of a Transfer Pricing Study

A transfer pricing study is a thorough review, usually conducted by an outside party, of the company’s pricing policies and the documentary support for those charges. Such a study can produce a number of benefits to the enterprise:

  1. Reduce taxes and penalties by assuring that the company’s transfer pricing policies comply with all requirements in the local jurisdiction, including meeting local documentation rules.
  2. Provide support for transfer pricing-related deferred tax assets and deferred tax liabilities recorded in the company’s financial statements.
  3. Identify opportunities to reduce the company’s global effective tax rate by restructuring multinational operations.
  4. Identify opportunities to increase global supply chain efficiency by relocating operations or reorganizing legal entities.

Governments Are Enforcing Transfer Pricing Rules

The U.S., and most jurisdictions with transfer pricing regimes, has instituted requirements that require businesses with related party transactions to develop and retain documentation supporting the arm's length nature of their related party transactions. Such documentation must be prepared in a prescribed format that may vary by jurisdiction. Often, it must be completed by the time the tax return is filed, reflecting the related-party transaction. If an adjustment is made by a taxing authority and the required documentation is not available, the company may face significant penalties.

   In 2010, the Internal Revenue Service (IRS) released the final version of its new Schedule UTP: Uncertain Tax Positions Statement. Schedule UTP is used by a corporation to report to the IRS federal income tax positions for which the corporation or a related party:

  1. Has recorded a reserve in an audited financial statement; or
  2. Has not recorded a reserve because the corporation expects to litigate the position.



The schedule requires corporations to identify those uncertain tax positions that specifically relate to transfer pricing separately from other uncertain tax positions.

For 2010 and 2011, Schedule UTP applied to very large corporations — those with assets of $100 million or more. For 2012, the reporting threshold drops to $50 million and then to $10 million for 2014. Therefore, companies currently exempted from the Schedule UTP filing requirement will need to be prepared to file the form in the future.

Also in 2010, the IRS reorganized its examination division to include an international unit with a dedicated transfer pricing director and a dedicated chief economist. Since the reorganization, companies under examination by the IRS have seen an increase in the number of Information Document Requests relating to transfer pricing matters and more international agents being assigned to examination teams.

It seems likely the number of countries examining transfer pricing policies will only increase. The Organization for Economic Cooperation and Development (OECD) and the United Nations (UN) have each issued guidelines to assist countries in developing their own transfer pricing rules.

One factor that is consistent between the U.S. tax regulations, OECD guidelines and UN guidelines is the need for contemporaneous documentation supporting how the transfer price was determined and that the price is within a range of what other parties charge in similar arm’s length transactions.

Please tune into the Chemical Equipment Daily for part two of this two-part series. What’s your take? Please feel free to comment below! For more information, please contact Slemmer at 646.625.5732 or [email protected], or contact Wolfson at 646.254.7416 or [email protected], or visit