Tax guide for 2023: Top planning considerations

Transfer pricing has rarely been more difficult thanks to rising interest rates, supply chain disruptions, sweeping international tax law changes, and increased global reporting requirements. Transfer pricing has also never been more important.

The growing exposure involved with transfer pricing issues is matched only by how pervasive it is. Multinationals are required to determine an arm’s length transfer price for any cross-border transaction or agreement between related parties, including for goods, services, intangible property, rents and loans. This represents a staggering amount of activity. According to the U.S. Census Bureau, 42.6% of all imports and exports are between related parties, and this doesn’t even include intercompany services, loans, or payments for intangibles.

The amount of tax at stake can also be substantial. The largest tax disputes in U.S. Tax Court history involve transfer pricing, with judgments reaching billions of dollars in taxes and penalties. The IRS has been successful in its recent litigation and is stepping up enforcement. These efforts will be aided both by $80 billion in new IRS funding and new international tax agreements. The Base Erosion and Profit Shifting (BEPS) initiative from the Organisation for Economic Cooperation and Development (OECD) is continuing to drive legislative changes worldwide that will continue to impose new rules and reporting for transfer pricing.

The costs of a transfer pricing dispute can go beyond the adjustments in tax and the potential 20% and 40% penalties for valuation misstatements. Transfer pricing issues are notoriously complex and disputes are difficult to resolve – resulting in sizeable costs in professional fees and in-house resources. Due to the cross-border nature of the issue, all transfer pricing disputes involve at least three parties affected by the outcome: the taxpayer and both countries affected by a change in transfer price.