Carri Koshkin, JD, is a shareholder in Doeren Mayhew’s International Tax Group in Houston.

My company buys products from our non-U.S. affiliate, and I know these transactions are required to be at “arm’s length.”  If I don’t document my transfer pricing policies, and the IRS makes an adjustment, will I be charged a penalty?        

Generally, the transfer pricing penalty provisions are triggered when taxpayers fail to reasonably comply with documentation requirements. The requirements are that sufficient documentation be maintained to establish that the taxpayer used reasonable efforts to conclude that the transfer pricing method used to allocate profit between the two affiliated companies is at arm’s length.

The penalties for non-compliance apply when:

  1. The taxpayer does not comply with these documentation requirements
  2. The resulting transfer pricing adjustment exceeds certain statutory thresholds
  3. And the adjustment results in an additional U.S. tax liability.

What other costs or ramifications do I need to worry about?

The company could incur an additional cost often not considered. Transactions with affiliates impact two parties since they are an allocation of profit. Non-U.S. countries often will not allow offset for prior-year adjustments occurring in the United States. As such, an IRS adjustment could also result in additional tax over what would have been incurred had the transfer pricing documentation and policies been maintained.

Smaller companies struggle with developing documentation to satisfy the prescribed requirements and mitigating the risk of a one-sided tax adjustment. Work with your international tax accountant to identify a documentation process that suits your needs while considering the risk relevant to your size.

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Carrie Koshkin, JD, is a shareholder in Doeren Mayhew’s International Tax Group in Houston and can be reached at 713.789.7077. For more information or assistance navigating transfer pricing, contact our international tax accountants in Michigan, Houston or Ft. Lauderdale.