Managing intercompany transfer pricing for the small and mid-size business

Section 482 allows the IRS to move income and deductions between related entities to prevent tax avoidance or to clearly reflect income. Section 6662 prescribes significant penalties for those taxpayers subject to Section 482 adjustments above certain thresholds.

What does this mean to a small or mid-sized business involved in cross border transactions with related parties? It means risking an adverse tax audit assessment resulting in large tax adjustment coupled with penalties and interest. In short, it means paying more to the IRS.

Fortunately, the transfer pricing function can be planned and managed to greatly reduce the risk of an adverse audit assessment. Exposure to the onerous Section 6662 penalties can also be greatly reduced, but only if a business plans ahead and creates proper documentation.

Here is a suggested list of steps to set objectives for your transfer pricing function:
  • Identify the intercompany transactions to be analyzed. Obviously, not everything needs to be reviewed.


  • Examine the overall structure of the intercompany transactions to determine that the company's objectives are being met and are in line with the levels of risk.


  • Review existing intercompany contracts and other agreements.


  • Create a written description of the activities performed by each member of the company group.


  • Set up proforma income statements for the companies involved in the selected intercompany transactions.


  • Analyze the various transfer pricing methods sanctioned by the IRS to determine which is the best method.


  • Search for comparable transactions.


  • Select the best pricing method.


  • Develop the documentation required to support the method selected.


  • Consider if an advanced pricing agreement with the IRS should be requested.




© 2007, Mallah Furman. All Rights Reserved.  
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