Section 482 of the U.S. Tax Code allows the IRS to adjust income, deductions, credits and other tax attributes to more clearly reflect income when it determines that transactions between related parties may have resulted in a distortion of U.S. federal income tax. The underlying principle behind Section 482 is that transactions between related parties (e.g., sales of goods, provision of services, lending of money, licensing of intangibles) must be conducted on an "arm's length" basis. The U.S. transfer pricing rules require taxpayers to have contemporaneous documentation (in a prescribed form) that supports the basis upon which taxpayer's have determined that the related party transactions reflected on their tax returns are at arm's length. If the IRS makes an adjustment under Section 482, and the taxpayer does not have the required transfer pricing documentation to support its position taken on the return, significant penalties can be imposed.
Transfer pricing documentation and planning have become a more significant risk area for taxpayers because (i) the IRS now requires that the 1st IDR issued in any examination of a U.S. taxpayer with foreign operations be a request for the required transfer pricing documentation, (ii) auditors have become much more stringent about requiring companies to book liabilities associated with transfer pricing risks (particularly where transfer pricing documentation is deficient or unavailable) in connection with the tax provision review associated with financial statement audits, and (iii) insufficient transfer pricing documentation is often cited as a lack of internal control within the tax department for companies subject to SOX 404 requirements.
We can assist you with identifying transfer pricing risks, planning to minimize such risks and also preparing transfer pricing reports to comply with documentation requirements.