Cross-Border Related Party Transactions (Clayton & Mckervey)

March 31, 2021 - Clayton & McKervey PC

This is a thought leadership article by PrimeGlobal member firm Clayton & Mckervey which addresses the changes to transactions that businesses will have to face post COVID-19.

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The global pandemic has forced business to make changes to deal with supply chain disruption, travel restrictions, and workforce health and safety issues. As a result, businesses are changing up their operating models on the fly. That means that risks, functions, and pricing among members of a global group may have changed with no time for documentation and analysis of cross-border pricing. Tax authorities will be looking for opportunities to refill the treasury coffers, so businesses should protect themselves against transfer pricing adjustments and penalties that can occur if intercompany transactions do not meet the arms-length standard.

What should you do?

At a minimum:

  • Review your intercompany contracts and make sure they are up to date with respect to current transactions
  • Prepare intercompany contracts/agreements for transactions if none currently exist
  • Evaluate current pricing to see if it still makes sense

The best defense is transfer pricing documentation that meets the standards set forth in Internal Revenue Code Section 482. Here is what the IRS will be looking for on audit:

  1. An overview of your business including economic and legal factors that affect pricing of products and services (i.e., industry analysis, description of competitors, market, trends, and competitive advantage)
  2. An organization chart that shows all related parties whose activities are relevant to transfer pricing
  3. Functional analysis that outlines the functions, risks, and assets of the business including the documentation of non-routine risks or cost sharing agreements
  4. Overview of intercompany transactions
  5. A description of the method selected for transfer pricing and the reason why it was selected
  6. Documentation of alternative methods considered and an explanation of why there not selected
  7. A description of comparables* used to evaluate your transfer pricing and any adjustments that were made
  8. Economic analysis explaining the application of the selected method
  9. Summary of the year-end data
  10. An index of the documents

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Clayton & McKervey PC

Headquartered near the international border of the U.S. and Canada, Clayton & McKervey is a Detroit-based, full-service accounting and business advisory firm focused on global business. The firm’s clientele includes closely held, middle-market, growth-oriented companies. Since 1953, Clayton & McKervey has created a strong reputation, both domestically and internationally, with four types of clients, U.S. entities with operations in other countries, foreign entities expanding to the U.S., businesses with international growth plans and clients in need of transfer pricing service.

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