First, Canadian companies may be willing to incur the generally higher Canadian tax rates in order to keep cash available to fund Canadian operations. The IRS may even impose a transfer pricing penalty. The concept of transfer pricing focuses on the price charged for these intercompany transactions. The principles of I.R.C. section 482 require pricing intercompany transactions at arm's length. Although ostensibly a simple concept, the arm's length standard has spawned hundreds of pages of regulations and case law.
Transfer pricing continues to be a hot issue for cross-border companies.
Because intercompany transactions across international borders continue to expand and because the IRS continues to rigorously review intercompany transactions, transfer pricing is the tax issue for the new millennium. Due to the political awareness in the U.S. created over the amount of taxes paid by Japanese automobile manufacturers, many companies only worry about transfer pricing with respect to tangible property. However, the transfer pricing regulations can trap Canadian owned companies with modest U.S. operations regarding a variety of intercompany transactions. Although USSub does not have any manufacturing functions, USSub employs its own administrative and sales staff while using CanCo's unique distribution software to ensure that there are not any distribution problems. In an effort to make sure that USSub is financially solvent, USSub enjoys generous payment terms to CanCo of six months and, if USSub's customers do not pay, USSub has the use of CanCo's collection staff.