Transfer Pricing Services
Appraisal Economics provides independent transfer pricing services for multinational companies and other commonly controlled corporate groups that move goods, services, intellectual property, or financing between related businesses. Transfer pricing is the analysis that sets and supports the prices that related entities charge one another, and tax authorities expect the result to reflect what independent parties would have agreed to at arm’s length.
As a pure-play valuation firm serving companies based in the United States and operating worldwide, Appraisal Economics brings that analysis without the audit or advisory relationships that can complicate the work at a larger firm, which matters when a study has to hold up under examination.
What Is Transfer Pricing And Why It Matters
When related companies trade with one another, the price they use directly affects how much profit lands in each country or state, and therefore how much tax each authority collects. To keep that allocation fair, the governing rule is the arm’s length standard, which asks whether a controlled transaction produced the same result that unrelated parties would have reached under comparable circumstances. In the United States, Section 482 of the Internal Revenue Code gives the IRS authority to reallocate income, deductions, and credits among commonly controlled businesses when their pricing does not clearly reflect income. For transfers of intangible property, the income has to be commensurate with the income the intangible actually generates, which keeps a valuable patent or trademark from being licensed to an affiliate for a token amount.
The stakes have risen as tax authorities around the world have increased their scrutiny of cross-border transactions. Most major jurisdictions apply the same arm’s length principle set out in the OECD guidelines, so a company operating in several countries has to defend its pricing on more than one front. A position that looks efficient on paper can lead to adjustments, interest, and penalties in any country that disagrees with it.
When You Need A Transfer Pricing Analysis
Companies most often need a transfer pricing analysis when they set or revisit the prices for intercompany transactions and want to document that those prices are defensible.
In the United States, preparing transfer pricing documentation is not strictly mandatory for penalty-protection purposes, but a company that keeps contemporaneous documentation supporting its method can protect itself from the substantial and gross valuation misstatement penalties that apply when an adjustment is large.
The documentation has to exist by the time the return is filed and be provided to the IRS within thirty days of a request. Foreign tax credit planning, international reorganizations, and cross-border leasing or structured finance arrangements all raise the same question of whether the intercompany terms hold up.
Controversy and audit defense
The second situation is a dispute. When a tax authority challenges a company’s pricing, the work shifts from planning to defense. This is where case development, exposure risk assessment, expert testimony, and alternative dispute resolution come in. A well-built study prepared before any challenge is the foundation for that defense, which is why the planning work and the controversy work are closely connected.
How Transfer Pricing Differs From Related Valuation Services
Transfer pricing is easy to confuse with other services that also involve valuation, and getting the distinction right matters because each one answers a different question.
Business valuation measures the value of an entire company or an ownership interest. Transfer pricing does not value the business. It prices the individual transactions that related entities conduct with each other, so the two often support different needs for the same client.
Intellectual property valuation and transfer pricing overlap most closely. Valuing a patent for sale, donation, or financial reporting is a different exercise from setting the arm’s-length royalty for licensing that same patent to an affiliate. The asset is identical, but the purpose and the standard differ. Our intellectual property valuation work sits right alongside our transfer pricing work for that reason.
Purchase price allocation assigns the price paid in an acquisition across the acquired assets for financial reporting purposes. It shares valuation techniques with transfer pricing but answers to accounting standards rather than intercompany tax rules.
Customs valuation assesses the value of goods entering a country and is determined by customs authorities. Because it can pull in the opposite direction from income tax transfer pricing, companies that import from their own affiliates sometimes have to reconcile the two.
Our Approach To Transfer Pricing
There is no single formula for an arm’s length price and no fixed hierarchy among the accepted methods. The right approach depends on the transaction, the available data, and which method yields the most reliable measure of an arm’s-length result. Our work starts with a functional analysis that examines what each party actually does, the risks it takes, and the assets it uses, because the economic substance of the arrangement drives pricing more than the contract language does.
For intangibles, that analysis extends into licensing. Determining a supportable royalty and analyzing each party’s contribution to the value of the intellectual property is central to pricing transfers of patents, trademarks, and other intangible assets. This is an area where our valuation experience and our transfer pricing work reinforce each other.
Throughout, our independence shapes the result. Because valuation is the only service we provide, our conclusions are driven by the facts of the assignment rather than by any other relationship with the client, which is what gives a transfer pricing study its credibility if it is ever challenged.
Discuss Your Transfer Pricing Needs
Appraisal Economics has provided economic analysis and transfer pricing services for companies operating across the United States and around the world. To discuss intercompany pricing, documentation, or a dispute with a tax authority, contact the team at Appraisal Economics.
Common Questions About Transfer Pricing
What is transfer pricing?
Transfer pricing is the method by which related entities under common control price the goods, services, intangibles, and financing they exchange. Because those prices determine how profit is divided among jurisdictions, tax authorities require them to reflect an arm’s length result.
What is the arm’s length standard?
It is the principle that a transaction between related parties should produce the same result that unrelated parties would have reached under comparable circumstances. It is the benchmark used in the United States and, through the OECD guidelines, in most other major jurisdictions.
Is transfer pricing documentation required?
In the United States, preparing documentation is not strictly mandatory for penalty-protection purposes, but keeping contemporaneous documentation that supports the pricing method protects a company from certain valuation misstatement penalties if the IRS makes an adjustment. The documentation must exist when the return is filed and be produced within thirty days of a request.
How is transfer pricing different from business valuation?
Business valuation measures the worth of a whole company or an ownership interest. Transfer pricing prices the individual transactions that related entities carry out with one another. A company may need both, but they answer different questions.
What happens if a tax authority challenges our transfer pricing?
The authority can reallocate income between the related entities and assess additional tax, interest, and penalties. A study prepared in advance, supported by a functional analysis and a documented method, is the primary way a company defends its position.
Why does independence matter when choosing a transfer pricing firm?
A transfer pricing study often has to withstand review by one or more tax authorities. An independent firm with no competing audit or advisory relationship produces an analysis shaped only by the facts, which carries more weight under examination.