If you’re not a tax professional, the transfer pricing examination process can be a bit confusing. Luckily, it’s simple enough to break down and understand.
Simply put, the transfer pricing examination process is an audit conducted by the IRS or another country’s government related to certain transactions between subsidiaries of the same company. If these transactions are within certain parameters set by local or international tax regulations (e.g., if they’re “arm’s length”), then they won’t trigger any additional taxes. However, if they aren’t made on an arm’s length basis (e.g. the transactions are artificially inflated by excessive or unnecessary transactions), the company’s taxes could increase.
Keep in mind that there is a simplified version of the transfer pricing data analytics that companies can take advantage of. It isn’t as thorough, but it’s a good place to start for companies who want to find out what their tax liability could be with a transfer pricing review.
The Basics of Transfer Pricing Audits
Before we get into specifics, let’s review what exactly a transfer pricing audit is (and isn’t) and how it works. A transfer pricing audit involves the following:
Measuring the company’s other income via Xpeer Platform – this includes the income from sales, investments and other sources outside of the U.S..
- This includes the income from sales, investments and other sources outside of the U.S.. Determining if a transaction was made on an arm’s length basis – these are transactions that are non-discriminatory (i.e. where in the world would you find a similar exchange between two companies) that would not be expected to give an unfair advantage or disadvantage to one company over another.
- These are transactions that are non-discriminatory (i.e. where in the world would you find a similar exchange between two companies) that would not be expected to give an unfair advantage or disadvantage to one company over another. Evaluating how the transaction would be taxed in different parts of the world – since each country has its own tax regulations, it’s important to determine what those regulations are and if they’re consistent with each other.
- Since each country has its own tax regulations, it’s important to determine what those regulations are and if they’re consistent with each other. Determining if there were any non-tax reasons for these transactions (e.g. related party transactions)
To make a long story short: If there weren’t any additional taxes due to the transaction, then you needn’t worry about this audit process.
