Of all the topics that are relevant to the U.S. market, this—along with data protection—is the most obscure. The tax authorities on both sides of the Atlantic want a large slice of the company’s pie. On the U.S. side, the subsidiary is required to draft a transfer price study, which needs to be updated every two years, and must be submitted to the IRS upon request. In the event of violation, penalties, interest, and additional payments can apply, which suggests that management should prioritize these issues.
It is almost impossible to fast-track the production of the transfer pricing study the moment the American tax authorities request it: the study represents a substantial amount of work that requires time and effort. Different methods of calculation can be applied to the transfer pricing study; the company must choose one and the decision must then be justified appropriately. In addition, the transfer pricing study must list an alternative method—the second option—and use it to conduct another transfer price calculation.
Within these formal requirements, the transfer pricing study must submit group-wide information about inter-company agreements. These are used as internal benchmarks in the analysis of the correct transfer price. Furthermore, the transfer pricing study must list third values of companies with comparable products or services. In most cases, the transfer pricing study uses published data by listed companies.
Given all these conditions, the transfer pricing study is usually a joint effort between tax professionals (CPAs – Certified Public Accountants) and lawyers in the U.S. They evaluate the contracts, cases, and tax rulings needed for the transfer pricing study, which show the fiscally acceptable parameters for the transfer price calculation.
The transfer pricing study requires intensive internal company support, which is essential in order to analyze the inter-company agreements mentioned above.
It is realistic to expect that preparation of the transfer pricing study will take a minimum of six months.