Any business entity operating in more than one country likely has intercompany transactions involving the exchange of tangible property, intangible property or services. The U.S. transfer pricing regulations, under Section 482 of the Internal Revenue Code, require that intercompany transactions be priced under the same terms that would have existed had the transactions taken place between unrelated entities. Similar regulations now exist in virtually every developed nation around the world.
Transfer pricing has become the most important international tax issue facing multinational corporations. Given the global nature of business today, it is easy to understand why. Corporations are increasingly crossing national borders to reach new customers or to lower the cost of doing business. This increase in cross-border transactions has been accompanied by an attendant increase in examination of transfer pricing by the IRS and other global tax authorities.
Corporations are facing more frequent examinations in non-US locations, as tax authorities throughout the world have placed more emphasis on transfer pricing. This has resulted in larger and more frequent adjustments to transfer pricing as well as double taxation.
Where firms do not have studies, the cost to defend against a transfer pricing adjustment can be high, and the firm faces the risk of additional penalties in some locations, such as the United States . Even in the best case scenarios, complying with transfer pricing regulations and handling transfer pricing challenges can tie up important firm resources and cost far more than having a transfer pricing study done in advance of an examination.
Our professionals have impressive broad-based experience that provides them with the background and expertise to address all transfer pricing issues faced by multinational corporations and professional service providers. Regardless of whether you prefer to completely outsource your transfer pricing needs, or are simply looking for support to augment your current transfer pricing capabilities, we are here to help you.
Our transfer pricing services are centered around seven primary solutions:
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Companies around the world are increasingly changing their organizational and operational structures to lower costs of doing business and improve the flow of goods and services. It is important to think in advance about the impact transfer pricing will have on these changes. By planning strategically in advance, you can potentially lower your taxes and operate your business knowing you are in compliance with the appropriate transfer pricing regulations.
Our vast experience enables us to provide strategic advice to structure your transfer pricing in creative and compliant ways. We also possess the foresight to spot potential transfer pricing issues before they become problems. After all, the only good transfer pricing dispute is the one that never occurs.
No matter how diligent you are in analyzing and documenting your transfer pricing, if you are engaging in significant business that crosses national borders, the odds are high that the pricing of those transactions will be disputed by a tax authority at some point.
Your company may face double taxation if taxing authorities on either side of a transaction disagree with your transfer pricing policy. We can help you reduce this risk through the use of the Competent Authority process. Tax authorities of the two jurisdictions can negotiate a mutually agreeable solution to the adjustment so that you are taxed only once on your income from the cross-border transaction. We can assist you in working with the Competent Authorities of the two countries to ensure that they understand your business, the transactions and the basis for your transfer pricing methodology.
Additionally, our professionals have significant experience in dealing with transfer pricing examinations, administrative appeals and tax litigation. Due to our broad depth of experience, we know first-hand the perspective of the IRS, the corporate taxpayer and the third-party tax advisor.
These are all roles we have assumed in dealing with various issues of transfer pricing dispute. No matter what type of dispute you are dealing with, we will provide you with the specialist support you need, and we will assist you in dealing directly with the appropriate authority.
An Advance Pricing Agreement (APA) is an agreement between a taxpayer and at least one government tax administration on the transfer pricing methodology to be employed for specific transactions governing specific years. We can help you determine when an APA is right for you and when it is not in your best interest.
APAs offer both taxpayers and tax authorities the opportunity to take the guesswork out of transfer pricing and eliminate the potential for adjustments or penalties. As long as this methodology is followed, the taxpayer can be certain that there will be no transfer pricing adjustments or penalties for the covered transactions during the covered years.
APAs offer great benefits to a multinational corporation. The obvious benefit is that an APA can eliminate the potential risk of a transfer pricing adjustment or penalty. In addition, if a bilateral or multilateral APA is entered into, it can eliminate the possibility of double taxation.
While the APA was created to deal with transfer pricing issues in future years, in practice the process often involves reviewing historical years that are open to examination. Given this expansive nature of the APA program, there is potential for a taxpayer to sit down with the IRS (or foreign tax authority) and reach a fair agreement on transfer pricing covering a lengthy period of time.
We have extensive experience in dealing with APAs, both from the taxpayer's point of view and from the IRS' point of view. We can provide you with the transfer pricing and economic support you need to negotiate a favorable APA.
Cost sharing arrangements involve the sharing of research and development costs between two or more related parties. Such structures can offer multinational corporations the opportunity to place ownership of intellectual property in low-tax jurisdictions. If set up properly, cost sharing arrangements can be an excellent tool for the deployment of research and development activities.
However, cost sharing arrangements are facing high levels of scrutiny from tax authorities all over the world. If set up inappropriately, cost sharing arrangements can leave your firm with great risk and potentially large unknown future costs.
Our professionals have participated in the creation and adjustment of numerous cost sharing arrangements. We have the technical skills necessary to assist you with calculating an appropriate buy-in payment, establishing an arm's-length royalty payment and assigning arm's-length returns for routine activities contributed by cost sharing participants.
If we are involved in the creation or adjustment of a cost sharing structure, we will prepare the appropriate documentation to support it. Regardless of whether you are considering establishing a cost sharing structure for the first time, or simply need to update an existing structure, Altus Economics can help you.
The U.S. transfer pricing regulations, under Section 6662 of the Internal Revenue Code, require that multinational corporations document the arm's-length nature of their intercompany transactions contemporaneously with the filing of their tax return. Failure to prepare such contemporaneous documentation can result in penalties of 20 to 40 percent of any transfer pricing adjustment levied. Similar documentation requirements now exist in developed nations all around the world.
Altus Economics can help you to ensure that your transfer pricing is in compliance with the appropriate regulations. Furthermore, we are capable of preparing the necessary documentation to support your transfer pricing and greatly reduce your risk of adjustments and penalties.
The IRS is not the only tax authority in the United States that scrutinizes transfer pricing. Many state tax authorities have adopted transfer pricing regulations that mirror Section 482 of the Internal Revenue Code. If you have significant business that crosses state boundaries, you could be at risk for a potential transfer pricing adjustment from a state tax authority.
We have dealt with all aspects of transfer pricing from a state and local perspective. Our professionals have prepared state and local transfer pricing documentation, offered planning advice to optimize state and local transfer pricing, and negotiated with state and local tax authorities to resolve transfer pricing disputes. No matter what your needs are, Altus Economics has the state and local transfer pricing experience that you are looking for.
For tax years beginning after 2004, business taxpayers can claim a deduction under the new Code Section 199 to offset income from qualified domestic production activities. The deduction has been commonly referred to as the “Manufacturing Deduction” which is actually a misnomer in that the deduction benefits many taxpayers engaged in “qualified production activities”, not just manufacturing firms. The deduction is properly known as the Section 199 Production Deduction.
The deduction is 3% for tax years beginning in 2005 and 2006, 6% for tax years beginning in 2007, 2008 and 2009, and is 9% for tax years beginning in 2010 and thereafter.
The deduction is limited to 50% of W-2 wages paid for a calendar year ending during the business' taxable year. The more you pay in wages, the greater the amount of Section 199 Production Deduction you may be entitled.
Qualified production activities eligible for the deduction are not limited to traditional manufacturing activities. Eligible activities include:
- Manufacture, production, growth or extraction of qualifying production property (i.e., tangible personal property such as goods, food and clothing, computer software and sound recordings).
- Certain “qualified film” production if at least 50% of the compensation relating to the production is for services performed in the U.S.
- Production of electricity, natural gas or water in the U.S.
- Construction or substantial renovation of real property and certain infrastructure in the U.S.
- Engineering and architectural services performed in the U.S. and relating to the construction of real property.
This new law may affect tax planning for international operations where, as a result of the production deduction, the effective tax rates for countries in which a business' operations are located have “flipped” as compared to the business' U.S. effective tax rate.
Under these circumstances, it may be time to consider restructuring the business' operations so as to take advantage of the flip in rates by shifting a greater amount of the total profit into the U.S. Our economists can help you calculate the deduction and assist you or your tax advisor in reviewing your current structure to determine if you have completely minimized taxes across your worldwide operations.
Since Code Section 199 is new, there is little in the way of guidance from the IRS as how to precisely allocate certain items of income and deductions for purposes of determining the production deduction.
Most tax experts have commented that businesses engaged in activities eligible and not eligible for the deduction will need to establish methodologies used in transfer pricing studies to justify the allocation of overhead expenses and certain items of income and expense as required by Code Section 199. Taxpayers will need to be prepared to demonstrate such methodologies were properly followed to sustain the deduction if the issue is raised in a tax audit.
Our professionals regularly deal with transfer pricing issues and use the same methodologies and techniques that are needed to determine your production deduction. Our vast experience in addressing these issues and providing innovative solutions will result in you receiving the greatest possible benefit from this new deduction.
