Financier Worldwide Annual Review: Transfer Pricing 2019 – United States
Excerpt taken from the report.
Q. In your opinion, do companies pay enough attention to the challenges and complexities of maintaining compliant transfer pricing policies?
ARMITAGE: Most of the largest companies – organizations with revenues of $2bn or more – are keenly focused on transfer pricing. The highest risks are for companies with annual revenues between $500m and $2bn. These are often complex companies, operating in a dozen or more countries. In many cases, these companies have grown rapidly over the last decade and are still struggling to catch up to the financial, legal and regulatory demands of multiple countries. These mid-sized companies are often surprised by the need for comprehensive transfer pricing reviews and the need for documentation to cover their operations across the globe, and do not always prioritize transfer pricing. For US companies with revenues in excess of $850m, the recent addition of an obligation to file a country-by-country report adds to both the complexity and the urgency of addressing it.
Q. To what extent have the tax authorities in the US placed greater importance on the issue of transfer pricing in recent years, and increased their monitoring and enforcement activities?
ARMITAGE: In the US, perhaps surprisingly, there has not been a significant increase in transfer pricing audits or assessments. The Internal Revenue Service (IRS) is strapped for resources, which is not healthy for the administration of the tax laws, although a public company’s financial auditors can play a robust role in monitoring compliance. One area in which the IRS has suffered is hiring and training additional examiners. In other countries, it is common to read that the tax authorities are hiring hundreds of new international examiners. That is not the case in the US. One place where there has been an increase in transfer pricing enforcement is across various states. Several state tax agencies have beefed up their audits on transfer pricing. This can catch taxpayers by surprise, because companies rarely focus on their domestic transactions in their transfer pricing analyses.
Q. What steps should companies take if they become the subject of a tax audit or investigation?
ARMITAGE: The first step, of course, is to call a transfer pricing professional. In some cases, the company has not closely analyzed its transfer pricing practices. Charges for goods and services between related parties may have evolved without much consideration. A transfer pricing professional can help identify which transactions create the highest risks, such as payments related to intangibles, for instance, or transactions involving highly profitable services. Almost no company can extensively analyze and document every related-party transaction. An experienced transfer pricing professional can sort out the high-risk from the low-risk transactions and make sure the taxpayer is ready to explain its practices to a tax examiner. Larger companies are better equipped to handle these challenges.