Transfer Pricing Pitfalls and How to Avoid Them

Recent trends on the international tax scene regarding the Internal Revenue Service (IRS) are clear: transfer pricing is a major of source of lost income for them when prices are not set at an arm’s length standard. The IRS is looking to recoup these losses and imposes a 20 to 40 percent penalty added to the assessed tax against companies in violation of the IRS’ transfer pricing regulations.

Transfer pricing regulations govern the prices that companies charge their subsidiaries or related affiliates for services, intangible items, or goods. Transfer pricing is the term used to describe the prices that related parties set for transactions among themselves. The Internal Revenue Code contains a set of rules that are designed to insure that related parties determine transfer prices based on an arm’s length standard. Transfer pricing rules and practices determine the allocation of income among tax jurisdictions arising from related-party transactions.

Steven M. Piascik, C.P.A., M.T., President of Piascik & Associates, P.C., a certified public accounting and financial planning firm located in Richmond, Virginia, finds that many international business people think transfer pricing issues only affect foreign companies with a United States affiliate. Additionally, many believe that an American company would not have to deal with transfer pricing matters abroad. Piascik cautions that this may not always be the case. Many countries, such as Japan and Mexico, have taken what many feel are retaliatory measures as a result of the increase in the scrutiny by the IRS of their United States based subsidiaries. This means that American companies with overseas affiliates could have to defend their transfer pricing policies anywhere in the world.

There are measures that a company can take to protect itself against transfer pricing pitfalls. Piascik & Associates, P.C. finds that being well prepared is the best defense to avoid IRS imposed penalties. Transfer Pricing Studies are the insurance policies needed to help defend a company’s pricing policy. According to Piascik, international companies need to have very clear transfer pricing guidelines in place prior to any potential IRS audits that may be performed.

Piascik finds that his firm best serves his clients facing transfer pricing issues by utilizing effective and defensible methods. His team of “Big Four” international tax talent helps his clients review their existing documentation and helps establish that all of the specified documentation (typically requested by the IRS) has been prepared and supports the pricing method utilized by the client. Most importantly, his team provides an economic analysis of the pricing method utilized.

A directive issued by Larry Langdon, Large and Mid-Size Business Division Commissioner of the Internal Revenue Service, emphasizes a comprehensive implementation of several processes relating to transfer pricing documentation and penalties. The IRS field examiners are now being instructed to more actively enforce the transfer pricing regulations. This national directive also makes clear that transfer pricing penalties should be imputed where warranted, and makes it very clear that these penalties should be asserted if there is a transfer pricing discrepancy where the documentation falls short of the required guidelines. Piascik advises business owners to be prepared with clear and accurate documentation.

Piascik, a former Senior Tax Manager with KPMG LLP, has built his international practice very deliberately. Not only has he hired “Big Four” International tax talent from Ernst & Young LLP, Deloitte & Touche LLP, and KPMG LLP, but Piascik also has hired an International Specialist, Terri Kuhn, who speaks six languages to better communicate with his foreign clients.

Piascik has established clear expectations that are at the heart of Piascik & Associate’s core values: 1) Always deliver more than the client expects, 2) Set high goals for your clients and yourself and 3) Work hard to reach your goals. These values resonate with all of his international clients.