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Transfer Pricing Article Warns Companies: Don't Overlook Intangible Property

Apr 18, 2012

NEW YORK – Transfer pricing – the  amount related affiliates pay each other for goods, services and other intercompany transactions – is subject to growing scrutiny from tax authorities who see it as an area of potential additional tax revenue. However, the transfer pricing regulations of most jurisdictions lack the specific prescriptive rules that other tax areas have. In an effort to  help companies best structure their cross-border transactions, and improve their chance of being successful during transfer pricing audits involving intercompany services transactions and intangibles, Guy Sanschagrin, managing director with WTP Advisors in Minneapolis, has written a new article appearing in Bloomberg BNA’s Transfer Pricing International Journal, Vol.13, No.4, April 2012

In it, he warns that one especially nebulous aspect of transfer pricing, intangible property (which may involve services such as process design, strategic sourcing, centralized business processes, and marketing), often fuels a hotbed of disagreement and controversy between taxpayers and tax authorities. 
“Companies, more than ever before, need to consider the big picture in how their services and intangible property (IP) add value in their global value chains and when thinking about their transfer pricing strategies,” says Sanschagrin.

Tax authorities want to ensure that services rendered from one affiliate to another aren’t below an amount that would be expected under the arm’s length standard.  Tax authorities are also increasingly understanding that certain services create intangibles and that the entities that pay for these services are the economic owners of the intangibles these services generate. 
“As companies are vying for market share, their key to competition takes the form of intangibles. Transfer pricing defines how profits are split up in the value chain, so a company needs to consider its value drivers to explain how profits are distributed in its value chain,” says Sanschagrin. 

For instance, one or more of the parties in an intercompany relationship typically brings intangibles (in the form of expertise, for example) to the relationship.  Tax authorities want to know that this expertise is priced appropriately.

“Some of the biggest risks for controversy from tax authorities are in the area of non-routine returns. Companies that can clearly articulate and document the nature and ownership of their non-routine intangibles will improve their probability of success in sustaining challenges by tax authorities and managing risks of double taxation and non-deductible penalties,” says Sanschagrin. 

Intercompany trade is a growing part of today’s integrated global economy, and tax authorities the world over are eager to reap the taxes that result from the relationships among a company’s affiliates. In the U.S. the IRS has shown heightened concern over transfer pricing strategies, hiring a cadre of international tax experts to stop companies from shifting profits to different countries via transfer pricing to avoid high taxes, according to Reuters

In addition, as recently reported, the Internal Revenue Service has fallen behind on Advance Pricing Agreements (APAs) made with companies striving to manage their transfer pricing exposures.  

“More often than not, companies who are in the APA process or have just concluded an APA tell me that they would not be willing to repeat the process”, says Sanschagrin. “Companies are finding that the APA benefits do not outweigh the costs and resources the APA process requires.”

Given these headlines, a key take home message for taxpayers is that companies can develop robust documentation as opposed to an APA to manage their transfer pricing risks.  A robust approach that clearly articulates the nature and ownership of intangibles and utilizes multiple transfer pricing methods is likely more cost effective than an APA. 

WTP Advisors is a leader in tax and capital markets advisory services for a global marketplace. Our highly skilled professionals equipped with years of industry experience, coupled with our cutting-edge technologies, make substantive and long-term differences to an organization’s profitability. WTP Advisors is headquartered in White Plains, NY, with offices across the Americas, Asia and Europe.

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