Transfer pricing for inter-company services: What corporate executives and practitioners should know

Abstract

Compliance with corporate tax rules rarely requires the involvement of executives outside the tax department. But for multinational enterprises, one area of corporate tax compliance that does require such attention is transfer pricing — specifically for inter-company services. From the chief executive to engineers on the manufacturing floor, the transfer pricing rules in the US and most developed countries require that their activities be tested according to local corporate tax and transfer pricing rules and regulations, to support the deductibility of their costs in either domestic or foreign locations. The testing process often involves fact gathering and analytical techniques that typically require the involvement of senior corporate executives to document how their efforts benefited either domestic or foreign business operations. Failure to prepare this analysis adequately can create significant tax risk for the enterprise and loss of deductibility for these expenses. It is therefore important that corporate executives have some awareness of international transfer pricing compliance requirements for their activities, and the implications for the enterprise. Corporate treasurers and tax and financial managers should also understand the techniques of transfer pricing compliance for services, and how these techniques can affect the enterprise’s financial position and tax examination risk. The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP or any other member firm of Ernst & Young Global Limited.