Sword and a Shield

Tax reporting for foreign operations, including transfer pricing studies to support related-party transactions, can appear complicated and scary. The common concern among multinational companies is that transfer pricing studies are complex and extremely expensive. At McGuire Sponsel, we debunk this myth. Our cost-effective approach to transfer pricing strategies and studies reduces client expenses, ensures proper compliance, and provides significant tax planning opportunities.

In addition to meeting required reporting mandates, a transfer pricing study can also result in the reduction of a company’s global effective tax rate. This is where transfer pricing can transcend being a mere compliance obligation and become a genuine planning tool. McGuire Sponsel’s transfer pricing team welcomes the opportunity to discuss these issues with your firm.

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Busting the Myths of Transfer Pricing

Generally, when a CPA identifies transfer pricing issues, clients shy away from completing a formal study based on preconceived notions that a study is expensive, time-consuming, only for large multinational corporations, or a 100-plus page deliverable.

McGuire Sponsel’s Global Business Services practice takes a different approach by viewing transfer pricing as a planning tool for your business, versus just a compliance obligation. Our Transfer Pricing is not done in a vacuum, which allows us to understand our client’s business from a commercial standpoint and use transfer pricing for smart treasury management.

IRS Guidelines

If your client’s tax return forms include form 5471 or 5472, a transfer pricing study is necessary.

Transfer pricing compliance applies to all U.S. companies with transactions between either a foreign subsidiary or a foreign parent company. IRS transfer pricing rules require that intercompany pricing between a U.S. company and a foreign affiliate must be based on an “arm’s length” price that would be charged in a similar transaction with an unrelated third party. U.S. transfer pricing is enforced under the authority of IRC Section 482, which allows the IRS to reallocate gross income, deductions or credits between two or more organizations and, under Section 6662, impose substantial penalties (as much as 40% of the deemed tax underpayment) for failed transfer pricing compliance.

McGuire Sponsel Transfer Pricing

COVID-19 Impact on Transfer Pricing

Transfer pricing documentation is an essential compliance item for multinational organizations. For example, if a U.S. entity is filing a Form 5471 or 5472, a transfer pricing study is required at the date the return is filed. However, 2020’s economic upheaval exacerbated compliance and we encourage clients to be proactive in adjusting intercompany pricing, modeling, and documentation. Taking a wait-and-see approach would be an unwise course of action, as companies that update and complete documentation in a contemporaneous fashion will be in a better position to defend their position and ensure they are properly structured to minimize effective global tax rate.