Transfer Pricing - American Appraisal

The erosion of the tax base through transfer pricing strategies has become a key concern for tax authorities throughout the world. Most authorities expect to see extensive documentation in support of transfer prices including descriptions of the company and transaction, details of the transfer pricing method applied and the assumptions on which the method is based. Generally accepted methods include:

Comparable Uncontrolled Transaction Method, comparing the actual price paid in an intra-group transaction to the actual price paid in a similar transaction between independent parties.
Comparable Profits Method, evaluating the amount charged in an intra-group transaction by comparing the profits generated by the company to that of a number of comparable companies.
Profit Split Method, allocating the profit in the transaction based on the relative value of each participant's contribution to the combined profit.
Cost Plus, calculating an appropriate mark-up to be added to the cost of providing the good or service to the other group company.
Resale Price/Resale Minus, starting at the final selling price and deducting appropriate gross margins to arrive at the transfer price in the intra-group transaction.
Transaction Net Margin, analysing the net margin achieved in an intra-group transaction relative to a base such as turnover, cost or capital employed.

Most transfer pricing rules are similar to those in the UK which require taxpayers to apply the arm's length principle in reporting income, profits or losses for tax purposes. Where transactions have occurred on a non-arm's length basis and this results in a disadvantage to the UK tax authorities, the taxpayer is required to make appropriate arm's length adjustments in its annual tax return under self assessment. Transfer pricing documentation needs to be prepared, or to be in existence, before a taxpayer lodges their annual return with the Inland Revenue.

The most contentious area within transfer pricing concerns royalty rates paid by intra-group companies in return for the use of intellectual property including patents, trade marks, brands, copyrights, customer lists and software. Our expertise in intellectual property valuation means that we are often in the best position to provide clients with advice concerning acceptable royalty rates that could be charged for the use of intellectual rights and to prepare documentation to support pricing decisions.