The Internal Revenue Service (IRS) has instituted a new international audit/examination strategy which includes targeting U.S. distributors of goods sourced from foreign-related entities. The goal of the IRS is to identify U.S. distributors who have reported losses or low profits on U.S. tax returns. The IRS believes they can assert that the identified U.S. distributors would have reported higher earnings and increased taxes, if proper transfer price methods were used.
Multinational corporations are allowed to set their own intercompany pricing strategies, but those pricing strategies need to be fair and at arm's-length according to U.S. transfer pricing regulations. Appropriately established transfer pricing strategies are the means by which to ensure compliance with tax rules and regulations. Proper transfer pricing compliance reduces the potential of tax evasion by reducing the opportunity for organizations to improperly transfer revenue from a higher tax jurisdiction to a lower tax jurisdiction.
U.S. distributors with intercompany transactions should have a documented transfer pricing policy in place to address the regulations. Transfer pricing benchmarking, documentation, and training can help businesses minimize compliance risk and reduce the potential for double taxation.