Stephen C. Fox, retired
U.S. International Tax
Steve Fox has retired
   International Tax      Transfer Pricing

Transfer Pricing


Prices charged between related entities (transfer prices) are subject to adjustment after the fact by tax authorities worldwide.  Most countries require that prices be documented before filing tax returns. Failure to do the documentation right can result in large penalties.  Worse, however, is the penalty for not planning the prices right: unnecessary extra tax.
Putting the right intercompany agreements and arrangements in place can save tax $ and reduce documentation nightmares.  By agreement, groups of companies can often shift functions and risks in a manner that radically alters the allocation of profits among group members.  This can reduce taxes for either distribution or manufacturing subsidiaries.  These reduced function and reduced risk entities often experience higher certainty in transfer pricing.
Transfer pricing documentation is not "one size fits all."  The level of analysis should be scaled to the transaction volume as well as level of risk.

Disputes with tax authorities on transfer pricing are often best resolved before prices are determined, through appropriate structuring of functions, risks, and relationships. This sort of planning can leave the essentials of business operations in place, driven by the needs of the business, but change contractual relationships to achieve international tax planning needs.  For an example of structuring, see  Cost Sharing  and  Commissionaires & Stripped Distributors on this site.
It is important that each entity bear the costs that benefit that entity.  For more information, see Shared Services.