Can a Company Avoid a Transfer Pricing Penalty in the United States?

A company may be able to avoid a transfer pricing penalty in the United States under certain conditions. Generally, the company may need to show that it made a reasonable effort to set its related-party prices correctly and followed the documentation requirements.

These rules can apply to both U.S. companies and foreign companies whose U.S. taxable income is affected by related-party transactions.

Generally, a company should be able to show four things:

• It used a reasonable pricing method — The company used an accepted method to determine the arm’s-length price.
• It applied the transfer pricing method correctly — The company properly used the chosen transfer pricing method and considered the relevant facts and information.
• It maintained proper documentation — The company kept records explaining how it determined and supported its transfer prices.
• It provided the documentation to the IRS on time — If the IRS asks for the documentation, the company generally should provide it within 30 days.

Let’s next understand some of the best practices that companies may follow to avoid any potential transfer pricing penalty in the United States.