Section 482 — Transfer Pricing
Transfer pricing refers to the pricing of goods, services or intangible assets within a multinational firm, particularly with regard to cross-border transactions. Such related-party transactions are subject to the international “arm’s-length” pricing standard, which reflects prices that are considered reasonable, fair, and market-based, or are charged to unrelated customers. This pricing standard is enforced by taxing jurisdictions worldwide and is set forth in the U.S. through Internal Revenue Code Sections 482 and 6662. Section 482 provides both the IRS and state tax authorities the power to reconstruct an intracorporate transfer price and levy a tax on the calculated profits when it is determined that low prices are set for tax evasion. A multinational can attain material profits by directing a subsidiary in a country with high corporate taxes to sell at cost to a subsidiary in a country with low taxes. The profit is thus earned where less tax is paid, providing the company as a whole with an overall gain.
Section 482 provides three methods for transferring intangible assets:
- Comparable Uncontrolled Transaction (CUT) Method
- Cost Plus Method
- Profit Split Method
Multinationals that utilize transfer pricing must satisfactorily document their adherence to the arm’s-length approach. Such compliance reduces the risk of audits and ensuing tax disputes and maintains transparency with investors. Transfer pricing documentation reflects each process used by the firm regarding transfer pricing and the arm’s-length pricing standard applied.