Exploring Corporate Governance Around the World

By Allison Garrett, Senior Vice President for Academic Affairs at Oklahoma Christian University

Friday, September 22, 2006

Transfer Pricing Audits

I've blogged previously about the new IRS regulations regarding transfer pricing. GlaxoSmithKline recently settled a huge transfer pricing dispute with the IRS for $3.4 billion (with a "B"). As I noted previously, the transfer pricing issue arises when companies attempt to shift income to lower tax jurisdictions and costs to higher tax jurisdictions.

Now, CFO magazine has an article about transfer pricing as a global risk management issue, and what you can do to avoid transfer pricing audits. The article is here. According to the article, triggers for an audit include "a loss-making affiliate, profit volatility, the existence of a foreign unit in a similar tax environment, and management fees."

Companies with legitimate losses must provide documentation and must demonstrate why transactions between affiliates in various countries are at arm's length. The key is documentation; companies must have written agreements with affiliates. Further, a study perhaps benchmarking amounts charged between true third parties will bolster the company's likelihood of surviving a transfer pricing audit.

The CFO article concludes by noting that transfer pricing is a priority for the IRS now. This means that it must also be a priority for company executives.

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