The Tax Cuts and Jobs Act (TCJA) tax reform and transfer pricing questions have become hot topics. However, as publications such as Tax Notes have observed, there is no single simple answer that applies across the board and fits all companies. While companies based in the U.S. are cheering on the new 21 percent corporate tax rate (a substantial relief from the 35 percent rate), local businesses may not have a firm grasp on how changes to transfer pricing could affect theme. (Keep in mind: these changes will affect 2018 corporate tax return filings, but not 2017.) A guiding principle that should be remembered: the effects of changes to transfer pricing guidelines will not impact every small business the same way. The effects must be considered on a case-by-case basis with each client. There are layers of factors that must be considered at the same time when attempting to model these transfer pricing issues.
Note: The following is a brief, generalized overview. It does not constitute comprehensive or actionable advice. It is imperitive that you consult with your own legal and tax professionals before engaging in a definitive strategy for tackling the issues of transfer pricing raised by the TCJA.
Transfer Pricing for Small Businesses
The issue of transfer pricing isn’t confined to multi-entity companies with operations overseas. The rules of transfer pricing also apply to local businesses who work with entities across state lines. Small businesses confined to domestic operations should aim to keep their transfer prices in an “arm’s length” (or ALP, which means Arm’s Length Principle) to market costs so that no one entity in the company is out of balance in their financial health with the other entities. Effective transfer pricing should be modeled to keep every component of the company in the same shape as the other component no matter where their operations are located.
Small companies with cross-border entities should take into account the cross-border prices incurred on services, royalties, loans, and other components such as inventory. If you do not adjust your transfer pricing to account for the new US federal tax rate, for example, the benefits may not be spreading equally across to cross-border entities, and the overall financial health of the company may become out of balance.
In addition, small businesses with cross-border entities should also look at tranfer pricing modeling to ensure they’re in compliance on both sides of the border. They should be diligent in preparing unique policy documentation for each country in question, and the documentation should be articulating and defending their transfer pricing decisions in each context.
Make the Effort to Review Your Transfer Pricing Approach
This last point may seem obvious but it is a common problem. Companies often rely on old transfer pricing models that haven’t been updated for a lengthy period of time. It is even more imperitive to review your transfer pricing model now that the TCJA is coming down the pike for 2018 corporate tax filings.
No Cookie Cutter Answers
The nature of transfer pricing means there is not a cookie cutter answer that applies to all small businesses all of the time. The simple fact is difficult to zero in on a single across-the-board, uniform impact of how TCJA will affect transfer pricing models for companies. As mentioned previously, it could easily be different for each small business and their unique situations and company goals.