What transfer pricing methods are used in your jurisdiction and what are the pros and cons of each method? The IRS encourages taxpayers to consider a “self-assessment” of potential transfer pricing non-compliance indicators to anticipate any concerns the IRS may raise. Self-assessment should begin with a sensitivity analysis of the parameters used (for example. B, the removal of a single entity from the comparable business set would lead to the results of the tested part being outside the reference field?). Self-assessment could also include comparing the results of the tested portion with a large number of profit-level indicators (TPIs) to ensure that the choice of the PLI is fully supported by the taxpayer. In addition, self-assessment could involve a proactive assessment of the distribution of benefits of the system between related parties and whether these allocations are appropriate on the basis of each party`s contributions. Functional analyses should be robust and associate the facts with analyses. Sometimes taxpayers put a list of facts in their documentation without any real analysis to associate the description of the company with the selection of methods. Some taxpayers, for example, present a checklist for “functional analysis,” which refers to who puts what with very little attention to “analysis.” If the company`s operating structure is not related to subject transactions and intercompany prices, or if it is not specified how and where the value that supports the distribution of profits between the parties is created, an audit is not carried out significantly. Functional analysis should be well supported on the merits and should not be based on general assumptions about activity.

Strengthening this analysis can be beneficial to the taxpayer by answering questions before they are asked by the IRS. Are there any sectoral rules for transfer pricing? Comparing the results of the tested part with a large number of profit level indicators (TPIs) is another form of self-assessment. Taxpayers should ensure that their selection of PLI is fully supported in relation to other PPLAPs, which may suggest another conclusion on the duration of intercompany transactions. For example, a foreign subsidiary of a U.S. company licenses the technology of its U.S. parent company to manufacture widgets for sale in Europe. The foreign subsidiary achieves an operating margin that does not necessarily indicate a high transfer price risk. However, based on the data available on the foreign subsidiary`s Form 5471, the foreign subsidiary achieves a higher return on investment (ROA) than the comparable firms used in the analysis of the taxpayer`s operating margin, indicating that the royalties paid by the foreign subsidiary may be too low. Taxpayers should be prepared to address any inconsistencies between the results of LA PLI. The Treasury Regulation Section 1.482-2 (a) (1) provides for an “interest-free” period for intercompanyl commercial accounts resulting from certain controlled transfers of objects or services.

There is also a safe haven for the interest on certain loans that range from 100% to 130% of the applicable federal funds rate, a public credit interest rate that varies regularly.