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When would it be wise to have a transfer pricing study? We…

When would it be wise...
When would it be wise to have a transfer pricing study?

We are planning to open a new corporation that will get business from US and non-US customers. Our business is IT consulting, software development. Many of the activities are outsourced to:
- daughther of the new corporation for IT development services, a LLC in Ukraine
- owner of the new corporation for marketing, sales, management, product management

We plan to grow our activities in the US, but we want to start lean and mean. Only 1 officer for some administrative work. The result is that we plan to have a small income in the US.

We heard that transfer pricing should be fair, arms length approach. Should it be researched? Does a research give any guarantees from possible audits by the IRS?
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Answered in 19 minutes by:
7/5/2013
USTaxAdvising
Category: Tax
Satisfied Customers: 1,237
Experience: US Taxation specialist.
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USTaxAdvising :

Hello, Thank you for using justanswer. I can assist you with your questions today.

USTaxAdvising :

Basically you will want to have a transfer pricing study done when you start having significant transactions either by volume or or dollar amount between related companies in different countries and you are pricing of such transactions is not "comparable" to non affiliated companies.

USTaxAdvising :

Transfer pricing is all about determining the fair value of goods/services between countries.

USTaxAdvising :

What the IRS is out to determine is that you are not shifting your taxable income to a lower tax rate country/jurisdiction.

USTaxAdvising :

If your intercompany sales and transactions remain comparable to that of competitors (i.e. you would pay the same or less to a non affiliated company) then I really don't see a need for the transfer pricing study unless it is required by your creditors.

USTaxAdvising :

I am sure you have already seen the write up by wikipedia on transfer pricing, but in the event you haven't here it is -http://en.wikipedia.org/wiki/Transfer_pricing#U.S._specific_tax_rules

USTaxAdvising :

it is quite good if one does not fully understand the intent of transfer pricing.

USTaxAdvising :

And no a study/research does not give a guarantee by the IRS but if you get a study done by a qualified professional then at least you have support for your transactions and could potentially sue the professional you engaged should the IRS assess penalties.

USTaxAdvising :

I hope this provides the clarity you were looking for, please let me know if you have any further questions.

USTaxAdvising :

Best regards,

Customer:

Well the point is that we think is fair ... for instance:
- the US entity gets contracts with real business from our other entity

Customer:

we want to charge around 25% for it, of the revenue, as all the marketing & sales is done for it outside of US

Customer:

The question is if that's fair ... we normally don't find such examples. Normally you have lead generators, but not real business generators.

Customer:

And does a interpricing study give you guarantees? If we would work within the boundaries of the study and the prices / margins that are accetable. Does it give a guarantee that the IRS will not have reasons to think that we are trying to evade taxes?

USTaxAdvising :

hmmm. How much in revenue are you looking at for 2013?

USTaxAdvising :

No it does not give a guarantee but more of a professional advisory that is reliable.

USTaxAdvising :

I do not see transfer pricing studies done by small business owners who have multinational business. Most of the time I see it with large corporations doing cross border business and utilizing lower tax rate countries and their economies of scale. Having said that if your company is performing significant cross border affiliated company transactions then it might be something you should investigate now. You may just need a professional opinion on whether or not a transfer pricing study would be required for your company.

USTaxAdvising :

Most big four accounting firms like KPMG, Deloitte, E&Y and PWC would look at your company for a nominal fee to determine the need for a transfer pricing study. It is extremely difficult to ascertain whether you should get one or at what point you should get one without knowing nature of the transactions, the $ amount, the potential cost savings, etc.

Customer:

When we incorporate later this summer, we might have 1 MLN dollar revenue this year. Next year we might have 3 - 4 MLN dollar.

Customer:

Our business is about IT consulting, programming, software developmentOur business model is to:
- leave 1-3% income in the US
- have 50% paid as production costs
- pay 25% for contracts
-

Customer:

- pay about 15% for management of the production unit, HR

USTaxAdvising : Well I would say that you need a transfer pricing study done when you start transactions abroad. Meeting this year. I think the best thing for you is to go to a local CPA firm or transfer pricing accounting firm and get their opinion of whether or not they believe it is necessary for you to have a full transfer pricing study done. They may charge you a nominal fee to determine if a full study is required which would be well worth your while. This would give you the peace of mind that you're looking for and the professional advice regarding cross-border transactions between your affiliated companies.
USTaxAdvising : Given the size of your revenues for the year I think you it is best to do it this year. Revenues in excess of 1 million are substantial
USTaxAdvising
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Satisfied Customers: 1,237
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