US Transfer Pricing Topics
Overview and Listing of Topics Relating to Transfer Pricing in the United States
As complicated as it can be to calculate taxable income for entities residing in a single national jurisdiction, the difficulty of determing tax liability for entities transacting business across international borders can be far greater, especially when these entities conduct transactions with subsidiaries or other related parties. When a parent company purchases goods from a foreign subsidiary, for example, the purchase price of those goods may or may not be consistent with the market value of those goods. In this manner, a parent company located in the U.S. could purchase manufactured goods from a subsidiary in another country at above-market prices increasing the taxable income of the subsidiary and decreasing the taxable income of the U.S. parent company. To avoid this situation, Congress has passed laws and the IRS has issued regulations requiring all related-party transactions to be conducted at arm's-length prices. Transfer pricing laws and regulations offer a number of methodologies to determine arm's-length pricing. Of these transfer pricing methodologies, many are not available for transactions with entities in certain countries, while others are appropriate only for certain types of transactions.
Because transfer pricing involves both legal and economic principles being applied to a fluid marketplace, new approaches are constantly being developed. Innovative approaches taken by companies, international agreements, U.S. laws, and IRS regulations and rules all play a role in this evolution.
Tax professionals working on transfer pricing issues need a familiarity not only with the legal constraints, but also with the economic principles involved. Here are some of the terms used in discussing transfer pricing issues:
- Arm's-Length Principle
- Best Method Rule
- Functional Analysis
- Global Price Lists
- Indirect Costs
- Intangible Property
- Noncompliance Penalties
- Related-Party Transactions
Depending on the jurisdiction, industry, and ownership structure, there are a number of possible methodologies that may be used to arrive at arm's-length pricing:
- Comparable Profits Method (CPM)
- Comparable Uncontrolled Price Method (CUP)
- Cost Plus Method (CPM)
- Cost of Services Plus Method (CSPM)
- Gross Services Margin (GSM)
- Profit-Split Method (PSM)
- Resale Price Method (RPM)
- Simplified-Cost Based Method (SCBM)
In some cases, it is possible to get permission from tax authorities to use a given method or price in advance. The tools for making transfer pricing more predictable include:
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