Transfer pricing refers to the process of establishing prices for cross-border transactions between controlled entities within a multinational corporate group.
Key Considerations:
- Arm’s length principle requires prices mimic those in comparable uncontrolled transactions.
- Comparability analysis assesses functions, assets, risks to determine appropriate pricing method from cost-plus to resale price.
- Contemporary issues involve valuation of intangibles and availability of reliable comparable data.
Example:
During an audit, the IRS challenged royalty fees paid by a U.S. subsidiary to its Irish parent company for brand intangibles, finding the agreed rate non-arm’s length.
Takeaways:
As artificial pricing distorts taxable income across jurisdictions, transfer pricing compliance reduces disputes while preserving group synergies and flexibility. Contemporaneous documentation substantiating arrangements mitigates controversy risks.