Transfer pricing studies still may be needed to comply with the sec. 482 regulations.

• Author: Mach, Joseph D.

Sec. 6662 (e) was amended, effective for tax years beginning after 1993, increasing the possibility that improper intercompany prices (transfer prices) between related companies would be subject to penalties. Under the new rules (as implemented by final regulations under Sec. 482 and proposed regulations under Sec. 6662 (e), issued in July 1994, and by final and temporary regulations under Sec. 6662 (e), issued on Feb. 8, 1996), transfer prices that are too high or too low are subject to penalties equal to 20% or 40% of any tax understatement resulting from improper prices. However, these penalties can be avoided if the taxpayer demonstrates that it has met certain tests as to its choice of transfer pricing methods and the application of those methods, and has prepared appropriate documentation to support its transfer pricing. The regulations provide that a study prepared by a professional, a "transfer pricing study," is one factor to be considered in evaluating whether or not the IRS will assess penalties.

To comply with the regulations, a taxpayer must examine the various methods of pricing particular goods or services, choose the "best method" of pricing, apply the method properly and maintain documentation as to how the prices were derived. The documentation must exist at the time the taxpayer's tax return is filed and must be given to the IRS within 30 days after it is requested by the Service.

For calendar-year corporations, the new rules (as implemented by the final and proposed regulations issued in 1994) should have been followed for 1994 tax returns, which were due (with extensions) by Sept. 15, 1995. Ideally, taxpayers should have engaged professionals to perform a transfer pricing study and had documentation in place by that date to support the fact that prices complied with one of the pricing methods specified in the regulations. Corporations with fiscal years ending on or before Aug. 31, 1995 also should have complied with the new law and regulations. Corporations with fiscal years ending between Sept. 30, 1995 and Nov. 30, 1995 still have time to comply with the new law and regulations if they have not already done so.

This item deals with the following categories of taxpayers:

* Category A: Fiscal-year taxpayers who have not complied with the new transfer pricing and penalty regulations, but still have time to do so.

* Category B: Taxpayers who have already complied with the new transfer pricing and penalty regulations.

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