Activities in the USA? Be aware of transfer pricing requirements
Transfer pricing documentation (including bench mark studies) is generally required to support the pricing of intercompany transactions. By maintaining comprehensive transfer pricing documentation for your business activities, you reduce the risk of the local tax authorities in the US imposing the substantial understatement penalty for transfer pricing adjustments upon audit.
Substantial IRS penalties upon audit
The US IRS may wish to impose substantial understatement penalties in the following situations:
20% understatement penalty:
- This penalty applies if an intercompany transaction is substantially overstated in the case of expenses, or substantially understated in the case of income. The penalty applies if a taxpayer misses the target by overstating expenses by 100% or understating income by 50% of the correct price.
- This penalty may also apply if the transfer pricing adjustment is more than the lesser of either $5 million USD or 10% of the taxpayer's gross receipts.
40% substantial understatement penalty:
- The substantial understatement penalty percentage increases to 40% if the price paid for property or services is 200% or more of the correct price, and if the price received is 50% or more lower than the correct price.
Maintain adequate transfer pricing documentation
If your transfer pricing documentation and benchmark studies are in order, and subsequent years' transactions are essentially similar to the current year, an annual (new) benchmark study is not required. The existing comparable company financial data will be updated to include the current year's financials, making subsequent years' studies much less expensive than the initial year. An investment in your transfer pricing documentation and benchmark studies reduces the risk of substantial understatement penalties from the IRS. The initial investment in adequate transfer pricing documentation will give your company a long term benefit.
The Baker Tilly International network is fully equipped to draw up and/or assess your Transfer Pricing documentation in different tax jurisdictions in a coordinated manner.