International Operational Transfer Pricing accounting principles, strategies and guidelines for methodologies in preparing appropriate M&A tax documentation for arms length transaction transparency solutions in Transfer Pricing

Transfer Pricing Methods:

International Operational Transfer Pricing accounting strategies and principles for methodologies in preparing appropriate M&A Tax guidance documentation for arms length taxation transactions with transparency solutions in Transfer Pricing.

Global Transfer Pricing Strategies and audit protection.Transfer pricing accounting ushers intra-company trade and provides incentives for value-enhanced specific investments. Results are based on comparing actual-cost transfer prices that include a markup over marginal costs with standard-cost transfer prices that are determined either by the central office ex ante (centralized standard-cost transfer pricing) or by the supplying division at the trading stage (reported standard-cost transfer pricing). For Mergers and Acquisitions or M&A tax, the actual-cost methods, we show that markups based on the joint contribution margin ( contribution-margin transfer pricing ) dominate purely additive markups (cost-plus transfer pricing). Obtain the following results:

(1) Centralized standard-cost transfer pricing dominates the other methods if the central office and the divisions ex ante face low cost uncertainty.

(2) The actual-cost methods dominate the other methods if the central office and the divisions ex ante face high cost uncertainty and later, at the trading stage, the buying division receives sufficient cost information.

(3) Reported standard-cost Operational transfer pricing dominates the other methods if the central office and the divisions ex ante face high cost uncertainty, and the buyer has insufficient cost information at the trading stage.

Most systems allow use of multiple pricing methods, where appropriate and supported by reliable data, to test related party prices. Among the commonly used methods are comparable uncontrolled prices, cost plus, resale price or markup, and profitability based methods. Many systems differentiate methods of testing goods from those for services or use of property due to inherent differences in business aspects of such broad types of transactions. Some systems provide mechanisms for sharing or allocation of costs of acquiring assets (including intangible assets) among related parties in a manner designed to reduce tax controversy.

Transfer Pricing at Arms Length

Nearly all systems require that prices be tested using an "arm's length" standard. Under this approach, a price is considered appropriate if it is within a range of prices that would be charged by independent parties dealing at arm's length. This is generally defined as a pricing structure that an independent buyer would pay an independent seller for an identical item under identical terms and conditions, where neither is under any compulsion to act.

There are clear practical difficulties in implementing the arm's length pricing standard. For items other than goods, there are rarely identical items. Terms of sale may vary from transaction to transaction. Market and other conditions may vary geographically or over time. Some systems give a preference to certain transactional methods over other transfer pricing methods for testing prices.

In addition, most systems recognize that an arm's length price may not be a particular price point but rather a range of prices. Some systems provide measures for evaluating whether a price within such range is considered arm's length, such as the interquartile range used in U.S. regulations. Significant deviation among points in the range may indicate lack of reliability of data. Reliability is generally considered to be improved by use of multiple year price data.

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Best Method Rule of Transfer Pricing

The best method pricing rule is intended to avoid the rigidity of the priority of methods that formerly had been required. The rule guides taxpayers and the IRS as to which method is most appropriate in a particular case. The temporary regulations no longer provided for an ordering rule to select the method for price determination that provides for an arm’s-length result. Rather, in choosing a method, the arm’s-length result must be determined under the method which provides “the most accurate measure of an arm’s-length result.”

The best method rule appears to be somewhat subjective and, because of its technical nature, may require special expertise. Certainly, the rule does not appear to eliminate the potential for controversy between the IRS and taxpayers. The rule will likely require taxpayers to expend more energy developing intercompany transfer prices and reviewing data.

The best method rule had three limitations:

1) Tangible property rules normally do not adequately consider the effect of nonroutine intangibles in determining which method is the best method. In these cases, adjustments may be required under the intangible property rules.
2) Tangible property comparable methods may be superseded, especially as they effect significant nonroutine intangibles that are not defined.
3) A taxpayer can request an “advance pricing agreement” to determine its best method. 

Transfer Pricing Section 482,,id=120220,00.html

Transfer Pricing Compliance Directive,,id=156262,00.html

Pacific Association of Tax Administrators (PATA) Transfer Pricing Documentation Package,,id=156266,00.html

Sec. 482 of the United States Internal Revenue Code, in its entirety, states:
SEC Rule 482 on Transfer Pricing:

"In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. In the case of any transfer (or license) of intangible property (within the meaning of section 936(h)(3)(B)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible."

The last sentence of the section, which was added to the code by the Tax Reform Act of 1986, applies to taxable years beginning after Dec. 31, 1986, but only with respect to intangibles transferred after Nov. 16, 1985, or licenses granted after such date, or before such date with respect to property not in existence or owned by the taxpayer on such date, except that for purposes of section 936(h)(5)(C) of this title, such amendment applicable to taxable years beginning after Dec. 31, 1986, without regard to when the transfer or license was made.

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