Transfer pricing planning involves deciding how related companies in different countries should price their transactions while complying with U.S. and foreign tax rules.
Effective transfer pricing planning should begin before a foreign business starts operating in the United States or a U.S. business starts operating outside the United States. The goal is not simply to reduce taxes. It is to establish prices that reflect the functions performed, assets used, and risks assumed by each related company. This will ultimately be supported under the arm’s-length standard.
Therefore, transfer pricing planning is important for both foreign businesses investing in the United States and U.S. businesses expanding into other countries.
First, let’s understand transfer pricing planning for foreign businesses investing in the United States.