Because of its expertise in transfer pricing, ECS can work with clients to ensure consistent documentation and support for purposes of inquiries by both the U.S. Internal Revenue Service (“IRS”) and U.S. Customs and Border Protection (“CBP”).
Transfer Pricing Audit Support
ECS’ economic studies have been used in all stages of U.S. and non-U.S. transfer pricing examinations, by both taxpayers and tax authorities. ECS studies describing the basis for the taxpayer’s transfer prices have been used to reach agreement with the IRS or other tax authorities at the field examination or appeals levels, and have been used in successful competent authority negotiations.
ECS provided the economic analysis used by a non-U.S. tax authority to audit and reach a settlement with a pharmaceutical company that carried out secondary manufacturing and distribution based on active ingredients purchased from international affiliates. As patent and trademark rights were owned offshore, the royalty rates to be paid by the local company were also at issue. ECS used a resale price or "work back" approach to estimate the value of the tangible and intangible property involved. Additional analyses, including profit splits and comparisons to the profits earned by comparable companies, were used to verify results and played a key role in the settlement process.
When a non-U.S. tax authority questioned why a company that had acquired its U.S. licensor to save it from bankruptcy was still paying a royalty, the economic report prepared by a senior ECS professional showed that the royalty was appropriate because the licensed intangible was uniquely valuable in the non-U.S. economy, the U.S. company was still creating enhancements to the value of the intangible, and the royalty was commensurate with royalties paid by other non-U.S. licensees. The non-U.S. authority accepted the royalty, as paid.
Inbound transfers of tangible property within a multinational corporation may give rise to Customs issues. The valuation of imports into the United States is generally based on "transaction value," or the price "actually paid or payable" for the merchandise. CBP can disallow the use of transaction value for valuation purposes when the parties to the transaction are related to each other and it can be shown that this relationship has affected the price.
There are several tests that can be used to show that the price paid by the related party importer has not been affected by its relationship with its supplier. The tests, in effect, demonstrate that the price is consistent with what an unrelated buyer would pay for the merchandise at issue. ECS can assist companies whose intercompany pricing is being questioned, whether formally or informally, by CBP.