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Is Your Business Prepared for an Increase in Transfer Pricing Audits?

November 08, 2022

Attention businesses…the IRS is expected to use funds from the recently passed Inflation Reduction Act to increase scrutiny on multinational companies’ transfer pricing activity. Here’s what you should know.

The Inflation Reduction Act, passed in August 2022, allocated $80 billion in funding to the IRS…and part of this funding is expected to go towards tax enforcement for multinational companies…especially regarding their transfer pricing activity. Here’s what could be coming.

What is transfer pricing?

This is the process by which businesses allocate income and expenses among related entities abroad. In general, transfer pricing must meet an “arm’s length” standard wherein the prices charged in an intercompany transaction must be similar to those charged by unrelated companies, for the same transaction, under the same circumstances. In other words, parties involved in a transaction are independent and on level playing fields.

Over the years, global tax agencies have gained increased powers to help enforce the arm’s length principle, resulting in stricter penalties, additional documentation, and increased exchange of information between jurisdictions.

Why is there increased transfer pricing scrutiny?

For years, the IRS has struggled to combat tax avoidance and abusive tax practices. Many companies have been shifting profits to divisions in lower tax jurisdictions to reduce their tax burden.

What happens during a transfer pricing audit?

The audit involves an examination of the company to assess whether taxpayers are operating in accordance with arm’s length or market rate principles.

Since transfer pricing audits are all-encompassing, with lots of dollars on the line, they can take years to complete. Penalties may be assessed as a result of a transfer pricing adjustment.

These audits can be expensive to defend, especially if the supporting documentation is outdated or not available. It is important to keep intercompany agreements updated as well as having the documentation to support each year’s transactions. A transfer pricing study can be completed to document the facts surrounding the intercompany transactions and pricing methodologies being used.

All businesses involved in cross border activities could be under scrutiny—make sure you take a proactive approach to transfer pricing compliance!

Questions? We can help. Contact us.

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