Companies that do business internationally utilize transfer pricing so that they can spread earnings across other affiliate and subsidiary companies with ease. Every year, tax laws are adapting and creating new practices that regular transfer pricing. What should you know about changes to this international tax practice?
Transfer Pricing 101
Transfer pricing is a method where one part or subsidiary of a company charges another division of the same company for goods or services. This can provide tax relief to the company because it can divide up earnings across multiple affiliates, divisions, and subsidiaries. For example, you can move earnings from a subsidiary located in a high tax area to another subsidiary with lower taxes.
Transfer pricing can cover a broad range of income streams including royalties, goods, services, patents, and even research. Some companies use transfer pricing internationally, while others use it domestically. Ones with the option to do so internationally can reap tremendous savings.
What Laws Regulate Transfer Pricing?
Transfer pricing is not illegal, but it is regulated by the federal government and some other nations. The IRS will carefully examine tax returns for businesses that utilize transfer pricing. Using it to adjust your income numbers can get you additional scrutiny when you file, and high-profile companies like Amazon have been investigated in the past.
One of the most important things you should keep in mind is the arm’s length principle. This dictates that any subsidiaries that are owned by the same company should operate like independent companies during transfer pricing. When deciding the value of the goods or services being sold, both parties should legitimately negotiate. If the items are sold far under market value, it would not be considered at arm’s length.
When you engage in transfer pricing, you should work with a tax professional to ensure that you have all the necessary paperwork completed. Transfer pricing documents should state how all the assets, functions, and risks are shared across the parties and make it clear that everything is above board. If you aren’t sure whether your documentation is adequate, you can confirm things with your tax accountant at MKS&H.
Overcome International Tax Challenges with Help from MKS&H
MKS&H provides tax and accounting services to businesses of every size and in every industry. We can work with you to make international taxes easily and avoid the most common international tax challenges. Contact us today for a consultation.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.