|ECONOMIC CONSULTING SERVICES, LLC
Economic Consulting Services, LLC
ECS' Transfer Pricing Network:
Documentation and APAs
As governments pay more attention to transfer prices, they demand more documentation from taxpayers. Under the IRC Section 6662 regulations, the IRS can impose 20 percent or 40 percent penalties if companies have substantial adjustments to their transfer prices, and lack adequate contemporaneous documentation of a reasonable effort to establish arm’s length prices.
Tax authorities have been building up their resources committed to transfer pricing and are preparing for audits and disputes to increase revenues. The IRS has hired additional international specialists with a focus on transfer pricing. The Canadian Revenue Agency has allotted substantial funds to deal with transfer audits. In Japan, there has been a yearly increase in the number of assessments. Italy has two types of audits, one of which is conducted by the tax police, and another conducted by the tax authority.
Many countries are establishing transfer pricing documentation requirements, recently China and France, in which failure to keep contemporaneous documentation will result in severe penalties. Transfer pricing documentation requirements are gaining momentum in the EU, prompting the EU Joint Transfer Pricing Forum to adopt a Code of Conduct that aims to standardize the documentation that multinationals must provide to tax authorities on their transfer pricing of cross-border intra-group transactions. In some countries that do not explicitly require comtemporaneous documentation, taxpayers are obligated to provide the information requested during examinations, and may be penalized, either explicitly or through adjustments,if they are not able to respond with complete information.
U.S. Section 6662 Documentation
ECS’ documentation reports for U.S. clients are designed to meet the requirements of Section 6662, bearing in mind that they may also be relevant for one or more foreign jurisdictions. ECS’ documentation reports range from providing relatively basic documentation for simple inbound or outbound sales to complex analyses documenting royalty rates, buy-ins for cost sharing agreements, and other intangible transactions.
Reports that are intended to be given to non-U.S. governments are designed to take account of the relevant governments’ preferences in methodology and terminology. In preparing a documentation report, ECS chooses and applies the most appropriate method based on a thorough analysis of the intercompany transactions and available uncontrolled comparables, while remaining constantly mindful of the client’s budget and the likelihood that the documentation will be subject to government scrutiny. ECS has provided documentation for use in several countries/regions, including Mexico, Canada, Europe, India and Japan.
Advance Pricing Agreements
Through an Advance Pricing Agreement (APA), companies can establish the arm’s length nature of their intercompany prices to avoid future disputes. Sometimes the APA process can also be used to resolve disputes over past years efficiently and economically. ECS’ reports provide the economic analysis necessary to demonstrate that intercompany prices are consistent with arm’s length expectations, a critical factor in obtaining an APA.
Relevant ECS Professionals