Transfer Pricing for U.S. Subsidiaries of Foreign Parents

If your U.S. entity pays a foreign parent or affiliate for services, IP, or goods, you owe transfer pricing documentation under IRC Section 482. The IRS examines this aggressively - and the penalties are gross, not net. Our transfer pricing practice handles this for U.S. subs of European and Asian parents.

Why the penalties matter so much

A 20% transactional penalty applies if a transfer price differs by more than 200% (or less than 50%) of the arm's-length price. A 40% net-adjustment penalty hits if the cumulative adjustment exceeds $5M or 10% of gross receipts. Contemporaneous documentation - prepared by the return due date - is the only defense.

The five documents

• Functional analysis: who does what, where, with what assets and risks.
• Economic analysis: which transfer pricing method, why, with benchmarking data.
• Industry analysis: market conditions affecting comparability.
• Intercompany agreements: signed, dated, before the transactions occur.
• Financial data: segmented P&L for the tested party.

The two methods that work for most services

For routine intercompany services (back-office, IT, R&D support), the Services Cost Method (SCM) - cost + 0% markup, qualifying services only - or the Comparable Profits Method (CPM) using a benchmarked operating margin are the workhorses. CUP and resale-price methods rarely apply outside of distribution and tangible goods.

Intercompany agreements - sign before transacting

An agreement signed in December for the whole year is the single most cited issue in IRS exams. Pair transfer pricing with proper intercompany agreements and international tax planning - they have to be designed together.

What we deliver

A defensible memo, benchmarking study, signed agreements, and a one-page board summary - typically in 4-6 weeks. Book a scoping call.