In most cases a transfer pricing study will not be required in order to file a IRS form 5471. A study may be required for Category 4 filers, under the circumstances described below.
If a U.S. taxpayer is: (i) required to file Form 5471; and (ii) has control of the foreign corporation and has any of the transactions described on Schedule M of the Form 5471 (a related party transaction) then the U.S. taxpayer should have a transfer pricing study completed prior to filing the Form 5471.
Only one of the four categories of filers of Form 5471have control of the foreign corporation. By definition all filers having control are considered to be Category 4 Filers. Therefore Category 2, 3 or 5 filers are not required to have a transfer pricing study, even if they have related party transactions with the foreign corporation.
The related party transactions listed on Schedule M include:
1. Selling or buying inventory.
2. Selling or buying tangible personal property other than inventory.
3. Sales of property rights (patents, trademarks, copyrights).
4. Cost Sharing payments (for example, research and development cost sharing)
5. Providing services (such as technical, managerial, engineering, construction or similar services)
6. Paying or receiving commissions.
7. Paying or receiving rents, royalties, and license fees.
8. Interest payments received or paid
9. Lending or borrowing money or use of credit.
A transfer pricing study is a written review of the market value of the related party transaction, including an analysis of each function that is part of the transaction. Market value is determined by looking at comparable prices at which the identical transaction occurs between unrelated parties; or by making adjustments to other transactions between unrelated parties to try to predict the proper pricing for the related party transaction. Economist are often used in arriving in making these estimates.
Prominent accounting firms often have transfer pricing units or departments that provide these studies. The low end pricing for a study in in the $25,000 range. Larger studies run over $200,000.
A transfer pricing study provides support for the price adopted by the parties in a related party transaction. Failure to properly price the transaction can result in a penalty for a substantial valuation of 10% of the omitted income on the return, in the case of a gross valuation the penalty is increased to 20% of the omitted income. Treasury regulations require that a transfer pricing study be completed before the tax return is filed and that if requested on audit that the study be furnished to the IRS within 30 days of the request. Penalties apply if no contemporaneous study is available.
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