Transfer pricing refers to the pricing of transactions between controlled entities and is the most important international tax issue among multinational enterprises (MNE). We offer the best transfer pricing strategy, documentation, and dispute resolution services. We with extensive transfer pricing experience and expertise, provide the professional and friendly services in Korean and in English.
The OECD guidance on transfer pricing documentation requires MNEs to provide tax administrations high-level global information regarding their global business operations and transfer pricing policies in a master file that would be available to all relevant country tax administrations.
It also requires that more transactional transfer pricing documentation be provided in a local file in each country, identifying relevant related party transactions, the amounts involved in those transactions, and the company’s analysis of the transfer pricing determinations they have made with regard to those transactions.
The country-by- country report requires MNEs to report annually and for each tax jurisdiction in which they do business the amount of revenue, profit before income tax and income tax paid and accrued.
Taken together, these three documents will require taxpayers to articulate consistent transfer pricing positions, will provide tax administrations with useful information to assess transfer pricing risks, make determinations about where audit resources can most effectively be deployed, and, in the event audits are called for, provide information to commence and target audit enquiries. In the U.S., under Internal Revenue Code (IRC) 482, controlled (related or associated) entities should price transactions in the same way that uncontrolled entities would under similar circumstances.
This is the “arm’s length standard”, which means that the price of the product that the taxpayer charges its related party should be the same as it would charge to an unrelated party for the same product under similar circumstances. The arm’s length standard applies to any and all transactions under IRC 482 including among other things, royalties for the use of intangible property, cost sharing arrangements, loans and advances and related interest, services, use of tangible property, on both outbound and inbound transactions.
If the transfer price is not arm’s length, the Internal Revenue Service (IRS) has the authority under IRC 482 to make adjustments by reallocating items of gross income, deductions, credits, or allowances in order to properly reflect income between the entities.
When analyzing the transfer pricing for controlled transactions, it is important to determine how the taxpayer selects a transfer pricing method to document that the prices charged to its related parties are arm’s length. There are various pricing methods available to the taxpayer which are discussed in the regulations promulgated under IRC 482.
The taxpayer must select the method that provides the most reliable measure of an arm’s length result taking into consideration all the data available. By preparing its transfer pricing documentation, the taxpayer can show the IRS that its transfer pricing was conducted at arm’s length.