A Primer On Transfer Pricing

If you are a company with a subsidiary here in the U.S. or abroad, you may very well be familiar with transfer pricing. For the uninitiated, a transfer price in general is the price charged between related parties (i.e., a parent company and its controlled foreign corporation) in an intercompany transaction.

If you are new to transfer pricing, it’s important to know that transfer prices directly affect the allocation of taxable income between related entities. Thus, your company’s transfer-pricing policies can directly affect its taxable income. IRC Sec. 482 gives the IRS the authority to adjust taxable income between two related parties if it deems the current transfer policy to be inaccurate.   A good rule of thumb for intercompany transactions is  that it be congruent with an arm’s length transaction between unrelated parties. Generally, a controlled transaction meets the arm’s-length standard if the income from the transaction is consistent with the income that would have been realized if unrelated taxpayers had engaged in a similar transaction under comparable circumstances.

So what constitutes an “intercompany transaction”?

• Transfer of tangible goods (e.g., a foreign manufacturing unit sells its output to a U.S. distributor)
• Intercompany services performed
• Intragroup financing
• Use of intellectual property