1. U.S. Transfer Pricing Basics Kate Fishers, CPA International Tax Services 407-802-1206 2009

2. Why Transfer Pricing Services? Client Service Our clients want/need international expertise Globalization of the economy, technology, and society has accelerated Compliance IRS (tax authorities) Increased Efforts IRS Strategic plan 2009 - 2013

3. Transfer pricing definition and purpose Prices charged by one affiliate to another, in an intercompany transaction involving the transfer of goods, services, or intangibles, must yield results that are consistent with those that would exist if uncontrolled taxpayers had engaged in the same transaction under the same circumstances. IRS may adjust income under Sec 482 to clearly reflect income.

4. Transfer pricing – Why 482? Without 482, related taxpayers could artificially shift their tax burden to more favorable taxing jurisdictions by establishing intercompany transfer prices different than the prevailing market prices

5. Arm’s Length Standard Consistent with the results realized if uncontrolled taxpayers engaged in the same transaction under the same circumstances But such comparables would rarely, if ever, exist Thus, the better references are comparable transactions under comparable circumstances

6. Best Method Rule Pricing must be determined under the method that provides the most reliable measure of an arm’s length result in the circumstances at issue, based on… –Comparability of controlled vs uncontrolled transactions –Quality of available data –Reliability of assumptions –Sensitivity of results to deficiencies in the data or assumptions used

7. Transfer pricing methods Regulations under Sec. 482 provide several methods of establishing transfer pricing –Comparable uncontrolled price –Resale price (tangible property) –Cost plus (tangible property) –Comparable profits –Profit split –Unspecified methods

8. Transfer pricing methods Acceptable methods vary depending on transaction. For example… Tangible products – governed by methods listed in Treas. Reg. Sec. 1.482-3 Royalties – governed by methods listed in Treas. Reg. Sec. 1.482-4 Services – governed by methods listed in Treas. Reg. Sec. 1.482-9

9. Transfer pricing definition and purpose Exceptions “White list” of services –Payroll –A/R and A/P –General admin –Corporate and public relations –Meeting coordination and travel planning –Accounting, auditing, tax –Health, safety, regulatory affairs –Budgeting

10. Transfer pricing definition and purpose “White list” of services (cont’d) –Treasury –Statistical assistance –Staffing and recruiting –Training and employee development –Benefits –Information technology services –Legal services –Insurance claims management –Purchasing

11. Transfer Pricing Documentation Required Pursuant to Treas. Reg. Sec. 1.6662-6(d)(2)(iii)(B), the following items must be documented in the transfer pricing study (“Principal Documents”)… Business overview Organizational structure Method selected and explanation why Alternative methods considered and explanation why not used Controlled transaction description and internal data used to analyze them

12. Transfer Pricing Documentation Required Continued… Description of comparables use, how comparability was evaluated, and what (if any) adjustments were made Explanation of economic analysis and projections used Description of any post-year-end data that would help determine reasonableness of method Index of principal documents and description of recordkeeping system for cataloging/accessing

13. Transfer pricing related penalties IRS increased scrutiny of transfer pricing - imposing two severe penalties: –Transactional penalty (20%/40% of tax underpayment) –Net adjustment penalty (20%/40% of tax underpayment) –Penalty avoidance

14. Transfer pricing study clients Who are our potential clients? Cross-border related party transactions U.S. parent companies w. foreign subsidiaries Foreign parent companies w. U.S. subsidiaries

15. Who spots transfer pricing issues? Attorneys CPAs How are the issues spotted…?

16. Form 5471 filed by certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations Form 5472 required when reportable transactions occur during the tax year of a reporting corporation with a foreign related party Additional penalties Information Reporting Requirements

17. LarsonAllen Transfer pricing services Complete transfer pricing study Limited scope transfer pricing study Advanced Pricing Agreement Consulting (in-house preparation)

18. CNL Center II 420 South Orange Avenue Suite 500 Orlando, FL 32801 Tel: 407.802.1200 Fax: 407.802.1250