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Transfer pricing rules apply when commonly controlled or related entities trade goods and services (eg sales, purchases, management fees, interest charges, and lease charges.)  Transfer pricing is particularly important between U.S. and foreign related entities.  All transactions between related parties must have the substantive financial characteristics of a transaction between uncontrolled parties each equally capable of representing its position and each dealing with the other as an independent party. 

Congress has enacted two special transfer pricing penalties related to transfer pricing.  Both penalties are imposed at a rate of 20% (40% at higher thresholds) which is applied to the tax underpayment.

The only way to minimize exposure to penalties and interest is to satisfy certain safe-harbor requirements.  Upon IRS request you must be able to supply contemporaneous documentation proving the selection and application of an IRS transfer pricing methods.  (See page of 40 of attached excerpted information for documentation required.)

Other countries, including Canada, also have substantial penalty provisions for transfer pricing adjustments.  You should consult with your foreign tax professionals in the countries you operate regarding tax laws in those areas as well.

This is an area of large tax exposure to your company if you are not in compliance.  Please review attached information on U.S. rules regarding transfer pricing requirements and contact us at your earliest convenience so we can discuss any potential exposure to transfer pricing penalties.