Frequently Asked Questions FAQ

Transfer Pricing

A: Transfer pricing refers to the pricing of transactions between controlled entities. Under Section 482 of the Internal Revenue Code (IRC 482) controlled entities should price transactions in the same way that uncontrolled entities would under similar circumstances.

A: The arm’s length standard is the core principle of US transfer pricing regulations. It requires that the pricing of transactions between related parties reflects what unrelated parties would charge in the open market.

A: The following three prerequisites must be found in order to apply IRC 482:

1) There must be two or more organizations, trades or businesses;

2) There must be common ownership or control, either directly or indirectly of such entities;

3) The IRS must determine that an allocation is necessary either to prevent evasion of taxes, or to clearly reflect the income of any of those entities.

Two parties owned or controlled directly or indirectly by the same interests can be considered related/controlled parties.

A: Non-compliance with transfer pricing rules can lead to transfer pricing adjustments if intercompany transactions are determined to be non-arms’ length and significant penalties and interest charges may also apply.

A: The table summarizes the current transfer pricing documentation obligations.

 

Country by Country Report

Applicable

Yes. According to Treas. Reg. §1.6038-4 And consistent with Annex III to Chapter V of the OECD Transfer Pricing Guidelines.

Filling Requirements

U.S. ultimate parent entity of a multinational group must file Form 8975 and corresponding Schedule A alongside its tax return.

Due Date

For C corporations by the 15th day of the fourth month following the close of its tax year (April 15th for calendar year taxpayers). An additional six-month extension can be obtained (October 15th for calendar year taxpayers).

Threshold

USD 850 million of prior year group’s consolidated revenue.

Notifications

No

Master File

Applicable

No

Local File / Transfer Pricing (TP) Documentation

Applicable

Yes. TP Documentation that meets Section 6662(e) requirements may reduce or eliminate penalties.

1.       An overview of the taxpayer’s business;

2.       A description of the taxpayer’s organizational structure;

3.       Any documentation explicitly required by Treas. Reg. §1.482-1 through 1.482-9;

4.       A description of the method selected and an explanation of why that method was selected;

5.       A description of the alternative methods that were considered and an explanation of why they were not selected;

6.       A description of the controlled transactions;

7.       A description of the comparables that were used;

8.       An explanation of the economic analysis and projections relied upon in developing the method;

9.       A description or summary of any relevant data that the taxpayer obtains after the end of the tax year and before filing a tax return; and,

10.   A general index of the principal and background documents.

Threshold

No

Submission

No. Documentation requirements are voluntary but necessary to ensure penalty protection.

Submission / Preparation Date

Tax return filling date. For penalty protection, documentation must be in existence when the tax return is filed.

Timing Requirement to Tax Authority

30 days upon request.

Penalties

Yes

 

 

A: Yes. There are penalties for inaccurate transfer pricing as specified in Section 6662 that can be assessed as an additional 20 percent or 40 percent of the tax underpayment:

  • The Transactional Penalty applies at a 20 percent rate where the misstated transfer price for any property or service is 200 percent or more, or 50 percent or less, of the correct price. The Transactional Penalty applies at a 40 percent rate if the misstated transfer price is 400 percent or more, or 25 percent or less, of the correct price.
  • The Net Adjustment Penalty applies at a 20 percent rate if the total net transfer pricing adjustment for the year is more than USD 5 million or 10 percent of gross receipts. The Net Adjustment Penalty applies at a 40 percent rate if the adjustment is more than USD 20 million or 20 percent of gross receipts.

Despite no penalties are directly associated with failure to submit transfer pricing documentation, preparing an adequate transfer pricing  study that meets Section 6662(e) is the best strategy in case of an examination or audit by the tax authority.

A: No. However certain information relevant to controlled transactions must be reported on Forms 5471 and 5472 information returns filed alongside the tax return.

A: According to the IRS “Transfer pricing reports that comprehensively document the reasonable selection and application of a transfer pricing method, consistent with the requirements of Section 6662(e), help demonstrate low levels of compliance risk and in turn help support early deselection of the transfer pricing issue from further examination. High-quality transfer pricing documentation allows the examining agent to rely on the taxpayer’s analysis of functions, risks, intangibles, value drivers, etc., saving both the taxpayer and the IRS time examining low-risk transfer pricing issues. Thus, robust transfer pricing documentation facilitates more efficient transfer pricing risk assessments and examinations for both taxpayers and examiners”.

General Corporate Income Tax

A: In summary, U.S. corporations are taxed on their global income, including foreign branches and certain foreign subsidiary income. If specific criteria are met, they can claim a 100% deduction on dividends received from eligible foreign subsidiaries, including gains from stock sales under Section 1248 of the Internal Revenue Code (IRC).

A: The 2022 Inflation Reduction Act introduced a 15% corporate alternative minimum tax (CAMT) for companies reporting profits exceeding USD 1 billion to shareholders, based on book income. This provision applies to tax years starting after December 31, 2022. An eligible corporation is subject to CAMT if its “tentative minimum tax” surpasses its regular U.S. federal income tax liability plus its liability for the base erosion and anti-abuse tax (BEAT).

A: In summary, foreign corporations operating in the United States are generally subject to taxation on income that is effectively connected with a U.S. trade or business. Additionally, certain other U.S. source income may also be subject to taxation. However, if the foreign corporation is a resident of a country with an income tax treaty with the United States and is eligible for tax treaty benefits, only the business profits attributable to a permanent establishment in the U.S. are subject to taxation. Furthermore, the tax rate on certain other U.S. source income may be reduced under the tax treaty provisions.

A: The current US federal corporate tax rate is 21%, established by the Tax Cuts and Jobs Act (TCJA) of 2017. This rate applies to both U.S. corporations and the income of foreign corporations effectively connected with a U.S. trade or business. Some foreign corporations engaged in U.S. trade may be exempt from U.S. tax on effectively connected income due to a tax treaty.

A: The following table summarizes the U.S. corporate income tax main features.

 

Tax Type

Rate (%)

Corporate Income Tax

21 (1)

Corporate Capital Gains Tax

21

Branch Tax

21 (1)

Withholding Tax

(2)

– Dividends

30 (3)

 

– Interest

30 (3) (4)

 

– Royalties from Patents, Know-how, etc.

30 (3)

 

– Branch Remittance Tax

30 (5)

 

Net Operating Losses (Years)

 

 

– Carryback

0 (6)

 

– Carryforward

Unlimited (6)

 

 

(1) The 21% rate is effective for tax years beginning after 31 December 2017. In addition, many states levy income or capital-based taxes. A base erosion minimum tax is also imposed on corporations. See Section B.

(2) Rates may be reduced by treaty.

(3) Applicable to payments to non-US corporations and nonresidents.

(4) Interest on certain “portfolio debt” obligations issued after 18 July 1984 and non-effectively connected bank deposit interest are exempt from withholding tax.

(5) This is the branch profits tax applicable to non-US corporations.

(6) A net operating loss deduction is generally limited to 80% of taxable income. Special rules apply to certain types of losses and entities.

A: Yes, many states and localities levy their own corporate income taxes on top of the federal rate. These vary significantly by state. The following table summarizes other significant taxes:

 

Nature of Tax

Rate (%)

Notes

Personal Holding Company (PHC) Tax

20

Applies to corporations satisfying a passive-income test. Imposed in addition to regular tax. Targets undistributed income.

Accumulated Earnings Tax

20

Penalty tax on corporations (excluding PHCs) accumulating profits to avoid shareholder-level personal income tax. Assessed on accumulated taxable income exceeding a calculated amount.

State and Local Income Taxes

Various

Imposed by most states and some local governments.

State and Local Sales Taxes

Various

Imposed by many states and some local governments.

Payroll Taxes

 

Federal unemployment insurance (FUTA): 6.0% on first $7,000 of wages (assuming full credit of 5.4%). Workmen’s compensation insurance rates vary by state and nature of employees’ activities.

Social Security Contributions (including Medicare tax)

 

Imposed on wages up to $160,200 (for 2023). – Paid by employer (6.2%) and employee (6.2%). – Medicare tax on all covered wages (for 2023): Paid by employer (1.45%) and employee (1.45%).

 

 

Additional Resources

– Section 482 of the IRC.

– Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Country Profile – United States of America.

Disclaimer: This FAQ is intended for informational purposes only and should not be construed as tax advice. Please consult with a qualified tax professional for specific guidance.

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