TRANSFER PRICING STRATEGIES

Many transfer pricing strategies are available. Before you dwell on the morass of new transfer pricing tax rules in depth, it might be advantageous for you to assess where your company fits, or should fit, in the spectrum of strategies.

Head in the Sand Approach

One approach to transfer pricing is to do nothing, stand pat. As one taxpayer stated,“We have some sand, and we’re looking for an ostrich. We don’t understand the tax rules, and neither does the IRS. We don’t want to rock the boat, or provide the IRS with a roadmap to our company with the documentation we prepare. The preamble to the new transfer pricing regulations says that the ‘estimated average annual burden per recordkeeper is 0.8 hours,’ and we will be devoting just that amount, 48 minutes per year, to transfer pricing.”

Comprehensive Analysis Approach

Some companies are implementing a full-blown comprehensive approach to transfer

pricing, creating and developing a team of decision makers and other resource

people, both within and without the company itself. More than 30 categories of professionals

could be included in the transfer pricing team, including the following:

Accountants

Accounts payable accountants. To review credit and collection strategies, a process needed to compare transactions

Controllers. Operations executives providing the database to develop and defend transfer pricing

Cost accountants. To develop the bulwark of the database needed to apply theresale price method or the cost plus method

Financial accountants. Using FAS and SEC accounting rules to prepare a database needed for comparative purposes

Tax accountants. To prepare the documentation for the tax return

Attorneys

Contract attorneys. An analysis of contracts and terms is mandatory for transfer pricing purposes.

Customs attorneys. The cost of tariffs and tax costs should be considered together for transfer pricing purposes.

Intellectual property attorneys. Ascertaining the scope of intangible property may be significant; licensing is an important facet of transfer pricing.

Litigation attorneys. Discovery procedures and confidentiality are needed long before litigation is contemplated.

Tax attorneys. Interface between the other attorneys and the accountants

Trade attorneys. Countervailing duties and dumping should be considered together with taxation.

Computer programmers. To implement record retention and prepare analytical reports

Customs specialists. Customs documentation is important evidence for tax purposes.

Economists

Economic geographers. To prepare analysis between countries, sometimes needed for comparative purposes

Microeconomists. Difference analysis is at the heart of transfer pricing analysis, preparing the viability of comparable transactions.

Macroeconomists. To select the database; to cope with business cycles as they affect transfer pricing

Employee benefits specialists. Fringe benefits might affect costing to determine the gross profit markup or gross profit.

Engineers

Engineering economists. To interface between production engineers and process engineers and economists

Production engineers. To determine functions of the company

Process engineers. To determine functional analysis

Financial analysts. To review financial reporting prepared by the company’s competitors, to determine comparable ratios

Industry specialists. Persons who know what is going on in the industry, developing market share analysis

Marketing specialists. To assess the advertising, marketing, and sales functions of the company

Mathematical statisticians. To determine the relevant range of transactions for comparability analysis

Personnel. To obtain job descriptions needed to determine functions performed

Operational analysts. Developing procedures that explain how the company works

Risk analysts. To prepare the mandatory analysis of risk and exposure

Tax specialists

International tax specialists. Interrelationship with foreign tax credit, allocation and apportionment procedures, foreign sales corporation, foreign reporting procedures in the United States, reporting of income to foreign jurisdictions

State tax specialists. States can impose transfer pricing rules; coordination of federal and state rules may be needed.

Foreign tax specialists. Foreign taxes are essential to the overall transfer pricing equation.

Treasurer. Prepare international currency and hedging analysis, which is required under the tax rules