Transfer pricing is often a taxpayer’s largest tax issue, frequently involving potential income adjustments in the tens of millions of dollars. The accepted global standard is the “arm’s length standard,” essentially the price in a transaction that would have resulted from “a taxpayer dealing at arm’s length with an uncontrolled taxpayer.” The ultimate purpose of a transfer pricing analysis is to determine and allocate the correct amount of taxable income among related parties in different taxing jurisdictions. 4Ĭlearly, transfer pricing cases are difficult to resolve, but why? To shed some light on this question, we will evaluate transfer pricing disputes between a taxpayer and two involved countries through the lens of a negotiation and dispute-resolution analysis. ![]() One reason is that governments that were forced to reduce audits during the COVID-19 pandemic are now increasing their audit activity to recoup lost tax revenue. 3 Most analysts expect the number of disputes to continue rising in the coming years. Statistics from the Organisation for Economic Co-operation and Development show that global inventories of disputes between treaty partners, largely composed of transfer pricing issues, nearly doubled from 3,328 cases in 2010 to 6,478 cases in 2020. 2 Transfer pricing litigation can take as long as 10 years to complete after the initial proposed adjustment.Īlso, transfer pricing cases are increasing in number. For example, transfer pricing cases in mutual agreement procedure programs take an average of 35 months to settle, nearly twice as long as non-transfer pricing cases. 1 Transfer pricing cases also take a long time to resolve. Transfer pricing disputes have produced some of the largest tax adjustments in the U.S., including a 2006 settlement of the GlaxoSmithKline case for $3.4 billion in additional tax, penalty and interest and several recent cases with proposed adjustments well in excess of $1 billion. Transfer pricing has been a top tax concern of corporate tax executives for decades, largely thanks to how difficult, complex, and expensive it can be to resolve transfer pricing disputes. “When an audit is initiated, the first request is to provide a copy of a transfer pricing study.”įor any questions or concerns about these changes and their impacts, or to obtain a transfer pricing study, please contact a Pinion tax advisor. “A study does not prevent a transfer pricing audit but does demonstrate to the government initiating the audit that the taxpayer is prepared and has put forth a good faith effort to follow the rules,” Swanson explains. This is an in-depth analysis of the related party transactions across borders and a comparison to economic data from other taxpayers in similar industries. “Taxpayers will want to work with a tax expert to obtain a transfer pricing study,” says Pinion tax advisor, Beth Swanson. In the U.S., the penalty is assessed on the underpayment of tax liability and is generally 20%, with the potential to double to 40% in certain circumstances. ![]() In addition, if the audit determines that an unfair pricing was used, the penalties are steep. This is an expensive proposition considering professional fees alone. These audits, which investigate prices and transactions, are often long and drawn out as they may involve two or more governments. So, the IRS’s Large Business and International (LB&I) Division will work to increase staff and technology to combat these transfer pricing practices. The IRS recognizes the potential for taxpayers to shift profits from one country to another through their pricing of goods and services exchanged. ![]() and foreign jurisdictions are priced fairly. In a nutshell, transfer pricing is the process that establishes whether related party transactions between parties in the U.S. One of the ways the IRS is going to put its $80 billion to use is increasing the number of transfer pricing audits it conducts.
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