Transfer Pricing Methods

What is transfer pricing?

Transfer pricing methods are the means through which comparisons of related goods, services and use of properties between comparable companies are documented, analyzed and adjusted for determining income and expenses for tax purposes. This also helps ensure that fair trade practices are also in effect by mandating the use of arm's length principles. Transfer pricing methods can have a huge impact on IC-DISC matters, the accumulation of foreign tax credits, and ultimately the profitability of companies operating internationally.

Comparing apples to apples

Transfer pricing methodologies vary in accordance to the situations in which they are imposed. In many cases, it can be difficult to compare “apples to apples”. New markets may not have any comparable companies competing in the same locale or similar economy, or the product being manufactured is completely innovative and no other company is even capable of legally producing a competitive product. 

Because of these inherent issues with a converging global community, IRS regulations allow for transfer pricing methods that provide the most accurate and reliable results. Some transfer pricing studies involve more than one transfer pricing method. In these circumstances, the IRS provides documentation stating the most accurate of the applied transfer pricing methodologies must be used. This is referred to as the best method rule.

Common transfer pricing methodologies

Although each transfer pricing methodology is unique, the most commonly used transfer pricing methods can include any of the following:

  • Cost-plus method
  • Comparable uncontrolled price method 
  • Comparable-profit method 
  • Residual profit split method 

Cost-plus method

In this transfer price method, the cost to manufacture the products or provide services are determined. An acceptable gross profit markup percentage is then added for the final calculations.

Comparable uncontrolled price method 

The price of the good and services are determined using a fair market value as though the two entities within a company were not related. This done by using comparable prices of the same transactions being utilized with an outside company.

Comparable-profit method 

Sometimes the best transfer pricing methods involves analyzing the financial records of an outside company by comparing similar transactions used be each company.

Residual profit split method 

This transfer price method uses the overall profit of the company and then split between the divisions in reference to their functions.

This is not an exhaustive list of the transfer pricing methodologies that are acceptable. PIASCIK expert tax consultants have over 70 years of combined international tax experience analyzing intercompany transactions, creating cost-sharing agreements and proving real world answers with modern solutions. 

Why should I use expert transfer study services?

U.S. tax regulations have mandates that allow the IRS to perform their own allocation of income and deductions anytime their appears to be a discrepancy. However, the transfer pricing methodologies they may use may not be in the best interest of you and your company. Additionally, over 60 countries now use transfer pricing policies. PIASCIK transfer pricing methodologies are thorough, efficient and designed to reduce your chances of being audited.  

Don't be left at the mercy of IRS transfer pricing methods. PIASCIK is recognized by industry peers as an expert in IC-DISC matters and has been a program partner with all of Virginia's inbound and outbound international programs. Flat rates and fixed fee engagements provide an economical alternative to expensive studies performed by large international tax firm that only treat you like another numbered file. PIASCIK professionals have 24 hour a day accessibility 7 days a week, so you have the answers you need when YOU need them. The first consultation is absolutely FREE, so you have nothing to lose by contacting PIASCIK today.