The transfer pricing regime is a crucial issue for the Internal Revenue Service (IRS), as it gives rise to a series of tax obligations and, along with these, significant fines for non-compliance. In this regard, the federal tax rules provide alternatives to reduce the risk of transfer pricing penalties.
Likewise, there are approaches from tax treaties and the guidance IRS provides to ensure certainty to companies in their transactions with related parties. Therefore, recommendations will be given to companies to improve the transfer pricing approach.
Transfer Pricing Penalties
In the United States, most tax penalties imposed under federal tax law are limited to about 20 percent of the amount of tax at issue. However, in the transfer pricing context, gross overvaluations or undervaluations used in intercompany transactions can result in penalties of up to 40 percent of the tax liability.
On the other hand, the cost of defending against an audit can be astronomical. The Amgen case is a perfect example of a transfer pricing dispute.
Procedures
- To implement an adequate transfer pricing strategy that considers the operations and risks assumed by your company’s subsidiaries.
- To have internal transfer pricing documentation ready according to the requirements requested by the IRS with the help of specialists such as TPC Group.
- Ensure that agreements between companies in the same group comply with transfer pricing policies.
- Seek an advanced pricing agreement with the IRS, especially for approval of your approach for transactions with your related parties over a long period.
- Seek a bilateral pricing agreement with the IRS and the tax authorities of the countries in which your company’s subsidiaries operate.
Source: JD Supra 31/05/22
