Client

A regional accounting firm referred a small multinational company with headquarters in Canada that had three U.S.-based service companies. The company provides installation services to the transportation industry. The Canadian company manufactures and outsources production of components used for the installation services.

Business Challenge

The owner-managers of the company had three transfer pricing-related concerns. The first concern was the lack of any transfer pricing documentation; their controller had also expressed this concern on a frequent basis. The second concern was the potential negative outcome if the Internal Revenue Service (IRS) were to audit the U.S.-based companies and if an IRS audit were to target transfer pricing, were they sufficiently prepared? The third concern was in respect of a shareholder that had a substantial minority interest in one of the U.S.-based companies and that individual was compensated based on the earnings of that company.  As a result, it was critical that the cross-border transactions accurately reflected arm’s length terms and conditions and had to be acceptable to that individual.

The unspoken concern was how they could manage their compliance cost associated with transfer pricing.

Solution

A review of the present pricing practices was performed and a number of alternatives were discussed. Each transfer pricing policy alternative was evaluated with respect to the financial impact, the ease of administration, the ability to defend to the IRS and the Canada Revenue Agency (CRA), as well as the impact and fairness to the minority shareholder. From these discussions, one transfer pricing policy was selected that ranked high in the agreed characteristics required for their transfer pricing policy. This policy was further designed, documented and implemented.

Results

A single report was prepared in a PowerPoint format to satisfy both Canadian and US transfer pricing documentation requirements. In addition, an Excel tool was provided to ease the company’s administration of the transfer pricing policy and to ensure each year’s financial results were reflective of arm’s length terms and conditions. Due to the low risk of penalties and small size of the international transactions, a light update to the annual documentation was advised. The shareholders and the controller commented that the newly implemented transfer pricing policy is stronger than the prior method and is sufficiently flexible to adapt to their evolving business.