Transfer Pricing

Transfer pricing, the art and science of determining the prices and the terms and conditions of sale at which related parties sell goods, services, or license, or transfer intangible property to each other, is essential for any vertically integrated enterprise where there is a need to determine profitability by business segment or across geographic boundaries.

While the interest of the multinational company is to minimize its taxes on a global basis by taking advantage of existing differences in the tax laws and rates among relevant jurisdictions, state and international taxing jurisdictions have a keen interest in the profits earned and reported by the company's local entity or branch, and in fact, are taking ever more aggressive positions and requiring advance documentation of transfer pricing results. The challenge is to counter these demands when faced with internal resource constraints and ensure that any savings survive any eventual scrutiny on audit.

BPM's Transfer Pricing Capabilities

BPM's transfer pricing professionals and international tax specialists are well positioned to assist our clients. We help international businesses minimize their global effective tax rates and reduce tax risks resulting from transfer pricing adjustments by using a variety of pricing techniques that establish and document intercompany pricing policies. The resulting solutions will conform to both the client's business objectives and tax planning goals.

The 4 principal areas we address are:

• Global Risk Assessment: Our assessment work focuses on helping clients analyze and document their cross-border transactions in accordance with the tax regulations in the countries in which they operate. We can identify the at-risk transactions and benchmark their results against industry comparables, using our access to one of the industry's most comprehensive databases of global companies. With our knowledge and experience, we can quickly adapt these resources to determine whether the transfer prices, commissions, royalties, or interest rates in a given transaction are in line with the arm's length standard and country specific requirements.
• Transfer Pricing Strategy: Opportunities are available to combine transfer pricing with corporate structuring to minimize taxes. Our team is experienced in strategies such as the migration of intangible property to offshore entities, supply chain restructuring through the use of contract manufacturing, and limited risk distributors. Opportunities also arise in the context of mergers and acquisitions as new entities and business lines are integrated into existing global structures, as well as the spin-off of operations or even an IPO. Our strategy work focuses on developing sound transfer pricing methods and associated transaction structures that satisfy management objectives and regulatory requirements.
• Conflict Resolution: BPM's transfer pricing professionals have the experience required to assist our clients in dealing with U.S. and foreign tax examinations, appeals, competent authority proceedings, and other venues for conflict resolution. We are experienced in working with law firms, as required, to provide expertise to defend the client's positions. Early resolution of potential controversy is always desirable and BPM is prepared to assist clients in requesting and negotiating both unilateral and bilateral Advance Pricing Agreements (APAs).
• Contemporaneous Documentation: U.S. and many foreign regulations require the preparation of certain documents to either support intercompany pricing or as a means to avoid penalties. BPM has a proven process for developing the factual and economic analyses to prepare this documentation in accordance with the relevant local administrative provisions. Working with our clients and our network of foreign affiliated firms, BPM can optimize the presentation of the facts and analysis and assist our clients in reconciling the potentially divergent approaches and requirements of the relevant authorities.

Financial Reporting Issues
Now that FIN 48 has been made applicable to private companies with audited financial statements for fiscal years beginning after December 15, 2008, transfer pricing will make up a significant part of the required analysis and disclosure for most companies with any substantial international operations. The two-step process demands an ongoing analysis of intercompany transactions combined with an in-depth understanding of the law, regulations, and approaches of the relevant taxing authorities. BPM can help with the overall process, or segments of it, such as the preparation or evaluation of the analysis and documentation of transfer pricing policies and practices.

Increased Focus by the Internal Revenue Service
As there is no doubt that the current administration is placing a high priority on international compliance, transfer pricing in particular, financial statement disclosures under FIN 48 will potentially take on greater significance in the future.

As proposed in Announcement 2010-9 in January 2010, the IRS will require a tax return disclosure beginning with the year 2010 on certain corporate returns. These will include a concise description of each uncertain tax position included in the financial statement in addition to other related details. After publishing a draft of Schedule UTP and related instructions and receiving voluminous comments from the public, the IRS has now filed a Notice of Proposed Rule Making to secure regulatory authority to proceed with the implementation of Schedule UTP. Although the requirements of Schedule UTP have been modified from the prior draft and the reporting threshold has been phased in, corporate taxpayers and their advisors are clearly on notice that the IRS has a substantial new tool by which to select taxpayers for audit and focus their audit resources. See Announcements 2010-75 and 2010-76 and Instructions for Schedule UTP for details of the revised initiative and comments on the IRS policy of restraint with respect to tax provision workpapers.

In addition to the direct reporting requirements of Schedule UTP, the IRS has clearly signaled its intention to increase its focus on transfer pricing and other international issues. In News Release IR-2010-88 dated August 4, 2010, the IRS reorganized and renamed the former Large and Mid-Size Business (LMSB) division effective October 1, 2010. The newly minted Large Business and International (LB&I) division will more than double in size and will focus on "high-risk international compliance issues," according to Commissioner Doug Shulman. LB&I will include a transfer pricing director and chief economist who will direct the transfer pricing practice group created early in 2010.

BPM will continue to monitor and report on these developments in order to assist our clients in minimizing the level of disclosures with respect to transfer pricing issues and position them as much as possible to reduce adjustments, interest and penalties on audit.

For more information, email us at bpm@bpmcpa.com.