Practical Guide to U.S. Transfer Pricing - Transfer Pricing Requirements Result in Major Burdens and Risks for Taxpayers

As a result of stricter rules and increased enforcement, transfer pricing has become a major problem for multinational groups, and an important cost of doing international business. Enhanced transfer pricing rules and enforcement were developed in reaction to real taxpayer abuse and neglect. But today, taxpayers often face transfer pricing adjustments proposed by tax authorities that go beyond what can be justified. Often, two or more countries are fighting over the same tax revenue, with the multinational group struggling to avoid double taxation. Regardless of the merits, transfer pricing adjustments and potential adjustments are often very large indeed. Consequently, transfer pricing adjustments become matters of concern for upper management, and must frequently be reserved for and/or otherwise disclosed in the taxpayer's published financials. Advance Pricing Agreements generally remove uncertainty avoiding the need to disclose to the world the taxpayer's uncertain transfer pricing circumstances.

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The U.S. taxpayer with substantial cross-border related-party transactions must cope with a significant number of burdens and risks from transfer pricing rules and enforcement, which are discussed below. It would be unusual for a single multinational group to actually suffer all of the adverse effects listed, but any one of these effects could be a significant encumbrance to the group's international business. The possibility of a significant encumbrance increases if the multinational group ignores the transfer pricing requirements of the relevant countries or if the multinational group follows an aggressive strategy beyond what can be supported factually.

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The burdens and risks stemming from transfer pricing requirements that may confront a U.S. taxpayer with substantial cross-border related-party transactions include:

1. Self-Compliance Obligation and/or Penalties
2. Burdensome Transfer Pricing Audits and Extensive Document Production
3. Dispute Resolution Proceedings
4. Double Taxation
5. Erosion of Benefits from Low-Taxed Operations
6. State Tax Costs
7. Interest on Deficiencies
8. Secondary Tax Effects Can Add to the Burden of a U.S. Transfer Pricing Adjustment
9. The Multinational Group's Transfer Pricing Usually Must Also Satisfy the Requirements of a Secondary Country
10. Transfer Pricing Compliance Often Requires Changes in the Business and the Participation of Management
11. Customs Obligations

LEXIS.com users can access more on this and other transfer pricing principles at 1-1 Practical Guide: U.S. Transfer Pricing § 1.03.