Transfer Pricing: 2025 Year-End Planning Guide for Private Companies
- HFM CPAs + Business Advisors
- 5 days ago
- 8 min read
Transfer pricing is consistently one of the top tax issues facing multinational public companies. According to statistics from the Census Bureau, nearly half of all import and export activity occurs between related parties, and every one of those transactions involves transfer pricing. The exposure for companies can be significant, and nearly all of the largest tax disputes in the U.S. involve transfer pricing.
Tariff developments, Pillar Two implementation, and international tax law changes all added to the complexity this year. It's critical for companies to leverage planning options and confirm they're satisfying reporting requirements.
ADOPTING A PROACTIVE APPROACH TO TRANSFER PRICING
Adopting a proactive approach to tax process improvements can be an aspirational goal for many tax departments. Resource constraints, business pressures, new technical developments, and other factors can cause even the most meticulously planned schedules to go awry, and before anyone realizes it, year-end is upon them once again.
Rather than feeling discouraged, companies can leverage their experience to understand what is achievable and then prioritize improvement projects that are appropriately sized for their business.
Common Year-End Transfer Pricing Challenges
Large Transfer Pricing Adjustments: Many companies use transfer pricing adjustments to meet their desired transfer pricing policy. However, significant year-end adjustments can have both income tax and indirect tax implications, leading to further issues and risks.
Lack of Transparency in Calculations: Transfer pricing calculations are often built in Excel and amended over the course of the years, perhaps to address one-time issues or changing situations. This can result in workbooks that lack a sufficient audit trail and contain hard-coded data, both of which undermine a reviewer's ability to validate the calculations. Additionally, without documentation, the process becomes dependent on the few people working directly on the process, which can create significant knowledge gaps if one of more of the key people leave the company.
Data Constraints: While the mechanics of most transfer pricing calculations are not complex, difficulties arise because of the variety of data needed (revenues, segmented legal entity P&Ls, headcount, R&D spend) and the challenges in accessing that data. This can lead to shortcuts and unvalidated assumptions.
Year-end Timing: Some companies close their year-end books with no transfer pricing review, and then rely on book-to-tax adjustments to true up their transfer pricing for tax purposes. While seemingly expeditious, addressing transfer pricing issues in this way can not only result in double taxation, but also may require an election under Revenue Procedure 99-32. For example, to avoid the treatment of any intercompany payments as nondeductible items such as contributions to capital or dividends, the taxpayer should make an election under Rev. Proc. 99-32 and account for the payments using that guidance.
Planning Considerations
Develop a Multiperiod Monitoring Process: Implement a process that tracks profitability throughout the year to help reduce significant year-end transfer pricing adjustments. This monitoring can also provide insights into whether underlying intercompany pricing policy changes are needed, allowing for a proactive approach to limit the number and magnitude of year-end adjustments.
Identify and Review Material Transactions: Conduct a detailed review of calculation workbooks to pinpoint deficiencies, such as lack of version control, hard-coded amounts with no audit trail, limited or undocumented key assumptions, and an incoherent calculation process. Companies can address one or more of these issues based on timing and resources. Small changes can have a significant impact.
Define a Data-Focused Project: Consider the data needed for transfer pricing calculations, investigate the form and availability of data, identify new data sources, and help data providers understand their importance in the overall process. This can be done on a pilot basis with a material transaction or group of transactions to keep the project manageable. Companies often discover new data sources and form valuable connections with data providers through these projects.
Learning from the year-end process provides clarity on areas that need improvement. These observations can be captured and converted into small improvement projects as soon as possible after year-end.
MANAGING BEAT WITH SERVICES COST METHOD
Companies facing potential BEAT liability may be able to reduce exposure through the services cost method (SCM) exception. The BEAT is a minimum tax that applies to MNEs that had at least $500 million in average annual gross receipts for the previous three years, make "base erosion payments" to foreign related parties, and have a "base erosion percentage" for the tax year of greater than or equal to 3% (2% for some taxpayers, including banks).
The definition of "base erosion payments" is broad and includes "any amount paid or accrued by the taxpayer to a [foreign related party] and with respect to which a deduction is allowable under this chapter."
However, the BEAT regulations provide an "SCM exception" from inclusion in the base erosion payment calculation for some outbound intercompany payments for certain intercompany services provided by non-U.S. related parties. This exception offers a significant opportunity to reduce BEAT exposure.
The IRS introduced the SCM to simplify the transfer pricing of some controlled services transactions and reduce taxpayers' compliance burden regarding routine intercompany services. Under Reg. §1.482-9 (b)(1), the SCM "evaluates whether the amount charged for certain services is arm's length by reference to the total services costs...with no markup."
To be eligible for the SCM for transfer pricing purposes, a service must meet several requirements:
It must be a covered service — either a service enumerated in Rev. Proc. 2007-13, or a service with a median arm's length markup on total services costs no greater than 7%;
It may not be a specifically excluded activity enumerated in Reg. §1.482-9(b)(4);
It may not be excluded from SCM due to the business judgment rule, which disallows the use of SCM if the service is related to competitive advantages, core capabilities, or fundamental risks of success or failure of the business; and
It must be substantiated in books and records adequately maintained by the taxpayer.
To apply the SCM exception, all the requirements of Reg. §1.482-9(b) listed above must be satisfied, except the business judgment rule. Moreover, adequate books and records must be maintained in accordance with the rules under Reg. §1.59A-3(b)(i)(C), instead of Reg. §1.482-9(b)(6).
If the SCM exception is applied to a transaction that is priced at cost plus a markup, only the cost component can be excluded from BEAT. If another, non-cost-based method is used, such as the comparable uncontrolled services price method, the cost component must be separated from the total payment; only the cost component can be excluded from BEAT. In other words, the markup or profit component is always subject to BEAT.
Planning Considerations
Multinational enterprises (MNEs) should undertake careful analysis of outbound payments for intercompany services to determine if some of the payment may be excluded from BEAT using the SCM exception, whether or not the SCM was used to determine the transfer pricing of those services.
In addition, MNEs availing themselves of the SCM exception must maintain records that document the total amount of costs of the intercompany services and the method used to apportion those costs between the services eligible for the SCM exception and those that are not.
MNEs should also coordinate their transfer pricing policies and documentation with their BEAT analysis and documentation to support consistency between them. For example, transfer pricing benchmarks with cost-plus markups above 7% may preclude the use of the SCM exception, even if the actual markup used for transfer pricing purposes was below 7%.
The OBBBA restored the full expensing of domestic research costs for tax years beginning after December 31, 2024 (although foreign research costs must still be amortized over 15 years). Moreover, the legislation also restored 100% bonus depreciation for property placed in service after January 19, 2025. As a result of these changes, as well as changes to the business interest deduction calculation, regular tax liability for many U.S. companies may decrease, potentially creating exposure to BEAT in 2025 and going forward. For U.S. companies that may no longer generate sufficient regular tax to offset BEAT as a result of the changes in the OBBBA, the SCM exception should be considered to potentially mitigate this new exposure.
PUBLIC COUNTRY-BY-COUNTRY REPORTING
Public country-by-country reporting (CbCR) mandates are already a reality in some jurisdictions, including Australia and the EU member states. U.S.-parented MNEs with constituent entities located in these jurisdictions should be preparing to comply with public CbCR requirements even though the U.S. does not require public reporting of CbCR data.
Australia
The Australian Parliament passed legislation introducing a public CbCR obligation effective from July 1, 2024. The legislation places a filing obligation on both foreign- and Australia-headquartered multinationals that have an Australian presence with more than AUD $10 million (approximately $6.7 million) of Australia-source revenue and AUD $1 billion (approximately $667 million) or more in global income. It requires these MNE groups to submit information on their global financial and tax footprint to the Australian Taxation Office (ATO), which will be made available publicly.
Under the regime, the parent entity of an MNE — rather than the Australian subsidiary — generally has the reporting obligation.
The public CbC report legislation applies for reporting periods beginning July 1, 2024, and reports are due within 12 months of the end of the reporting period.
EU
The EU on December 1, 2022, published in the Official Journal a directive that requires reporting entities to make publicly available a country-by-country (CbC) breakdown of the group's profits and certain economic, accounting, and tax aggregates. The directive entered into force on December 21, 2021, and applies from the beginning of the first financial year starting on or after June 22, 2024. The CbC report is to be published within 12 months of the financial year-end, so that the dates for filing the OECD CbC report and for publishing the public CbC report are aligned.
The directive affects two broad categories of entities. First, groups whose "ultimate parent undertaking" is outside the EU must file public CbC reports, if they have subsidiaries or branches within the EU, and if the EUR 750 million revenue threshold is met at a global level. However, EU subsidiaries and branches must report only if certain thresholds are also exceeded at the local level. Second, groups whose ultimate parent is in the EU must file public CbC reports when those groups have a consolidated group revenue of at least EUR 750 million.
The EUR 750 million threshold for the EU's public CbC report is the same as for the original OECD CbC report, but it must be met for each of the last two consecutive financial years rather than for only the prior year, as is the case for the OECD CbCR obligation.
Although some of the information to be reported for purposes of the OECD CbCR also must be reported in the EU's public CbC report, the EU public CbC report does not require the disclosure of the full OECD CbC report data.
The public CbCR generally should be published on the reporting entity's website. However, member states may instead allow publication on a register accessible to any party in the EU, provided that the reporting entity's website provides a link to the register's website.
Noncompliance with the publication obligation will be subject to penalties enacted by each EU member state.
Planning Considerations
Private companies in U.S.-parented MNEs should not assume that they do not have public CbCR filing requirements simply because the U.S. does not impose such a requirement. U.S.-parented MNEs need to be mindful of both the EU and Australian rules and deadlines regarding public CbCR filings.
U.S.-parented MNEs with operations in Australia that fall within the scope of the public CbCR regime there need to file a CbC report to avoid high administrative penalties for noncompliance of up to AUD 825,000 (approximately $535,000). Similarly, U.S.-parented MNEs with operations in EU member states must evaluate the filing requirements in each country to achieve compliance and avoid penalties.
Additional 2025 Year-End Tax Guides for Private Companies:
Questions?
Contact HFM CPAs for questions on how this change may affect your specific situation. Our team stays current with evolving tax and related legislation to help you navigate new opportunities and requirements.
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