Transfer pricing can become complicated when related companies operate in different countries. Although the OECD and tax authorities have developed detailed transfer pricing rules, businesses can still face uncertainty when structuring transactions, documenting their policies, and preparing for tax audits.
The OECD Transfer Pricing Guidelines provide international guidance on issues such as business restructurings, intangible property, services, financial transactions, and transfer pricing documentation. The OECD’s BEPS project has also strengthened transparency through measures such as Country-by-Country Reporting (CbCR). Countries continue to develop and update their own transfer pricing rules and enforcement practices.
In the United States, IRC Section 482 requires related-party transactions to produce results consistent with the arm’s-length principle. In simple terms, related companies should generally price their transactions as independent companies would under similar circumstances.
The U.S. transfer pricing regulations use a best-method rule. This means the taxpayer should select the method that provides the most reliable measure of an arm’s-length result based on the facts of the transaction. The analysis considers factors such as the degree of comparability and the quality of the available data.
Common transfer pricing mistakes can arise at several stages, from analyzing the functions performed by each company to selecting the transfer pricing method and maintaining supporting documentation.