Question

1. What are acceptable Transfer Pricing methods under US Tax Code?
2. Define and briefly explain “Discretionary Transfer Prices,” “Negotiated Transfer Price,” and “Goal Congruence.”
3. Define and briefly explain “Comparable Uncontrolled Transaction,” “Advance Pricing Agreement,” and “Arm’s Length Transaction.”

Answer 1

1) Below are the acceptable transfer pricing methods acceptable under US Tax code-:

a) Transactional transfer pricing methods

b) Profit-based transfer pricing methods

c) Unspecified transfer pricing methods

2) Discretionary transfer pricing is the method in which Internal Revenue Service can use its discretion choose the certain transfer pricing adjustments. For example -: IRS can discretely adjust the value of royalties under this pricing.

Negotiated transfer pricing -: Under this pricing, transfer pricing is mutually decided between the parties. This happens in such a way to resemble real market transaction. Both party negotiate to come to a solution.

Goal Congruence -: Under goal congruence, the tax payer understand their responsibilities and pay taxes to the government. It may be defined as the degree to which tax payer agrees with the tax authorities adjustments.

3) Comparable Uncontrolled Transaction -: The comparable uncontrolled price means that prices are comparable to those transaction which happend in the unrelated organisation. This is one of the effective method of transfer pricing.

Advance Pricing Agreement -: Under this arrangement, tax payer approaches tax authorities before the transaction for an appropriate transfer pricing methodology. Once this agreement is signed, both the parties adheres to this agreement for computing transfer pricing. This agreement is effective for a limited period of time and then again revised based on facts and circumstances.

Arm's length transaction-: It is the price in which we any unrelated party will do the transaction, without any influence or relationship and in a free market scenario. Neither party is in the situation have an interest to consequence any change in the transaction while doing with other party.