Multinational Companies do lot of intercompany transactions. U.S manufacturers market their products in foreign countries through their subsidiaries. Domestic parent companies sometimes provide technical or administrative services to thier subsidiaries abroad. These kind of transactions must take place in a transfer price. This transfer pricing can help allocate income properly. Transfer pricing can have significant effect on multinational corporation’s tax cost.
Code Section 482:
In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.
The regulation under Code Section 482 provide specific method for detrermining an arm’s length transfer price for various types of transactions. This includes transfer of tangible property, transfer of intangible property, loans and services.
Regulation 1.482-3 Methods to determine taxable income in connection with a transfer of tangible property.
In general. The arm’s length amount charged in a controlled transfer of tangible property must be determined under one of the six methods listed in this paragraph (a). Each of the methods must be applied in accordance with all of the provisions of § 1.482-1, including the best method rule of § 1.482-1(c), the comparability analysis of § 1.482-1(d), and the arm’s length range of § 1.482-1(e). The methods are—
(1) The comparable uncontrolled price method, described in paragraph (b) of this section;
(2) The resale price method, described in paragraph (c) of this section;
(3) The cost plus method, described in paragraph (d) of this section;
(4) The comparable profits method, described in § 1.482-5;
(5) The profit split method, described in § 1.482-6; and
(6) Unspecified methods, described in paragraph (e) of this section.
Taxpayers must apply the most reliable method for pricing to reach an arms length result.
For example, an inventory sale between affiliate companies can involve component parts and semifinished goods that are not sold in common market. Though it is very hard to come up with an approprite price in this situation, taxpayers must come up with a system to calculate a price that proves this transaction to be at arms length.
Code Sectoin 6662:
To promote compliance with the arm’s length standards, Congress enacted Code section 6662.
According to this code section:
(a) Imposition of penalty
If this section applies to any portion of an underpayment of tax required to be shown on a return, there shall be added to the tax an amount equal to 20 percent of the portion of the underpayment to which this section applies.
Disclaimer:
This information is for educational purposes only. It does not constitute any legal advice or opinion. Please do not use any of its contents without seeking a professional advice.
References:
www.jct.gov/publications.html
http://www.law.cornell.edu
http://www.irs.gov/publications
U.S Taxation of International Transactions by Robert J. Misey, Michael S. Schadewald
Introduction to United states International Taxation by Paul R. McDaniel, Hugh j. Ault and James R. Repetti
International Taxation by Joseph Isenbergh
International Taxation in a nutshell by Richard L. Doernberg.
International Income Taxation, Code and Regulations by Robert J. Peroni – CCH
Mansoor Suhail (Mani)
Accountant
MS TAX – BSBA – EA – ICIA – RA
Tax for Canada and U.S.A
Web: www.theaccountingandtax.com and www.taxservicesguru.com
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