Transfer Pricing Compliance
Market Express coordinates transfer pricing documentation and compliance for foreign-owned US LLCs. Ensure arms-length pricing, IRS Form 5472 compliance, and avoid costly penalties for intercompany transactions.
What is Transfer Pricing?
Transfer pricing is the pricing of transactions between related entities - such as a foreign parent company and its US subsidiary (LLC). The IRS requires that these transactions be priced at arms-length (fair market value) as if the parties were unrelated.
For example, if your Chinese factory sells products to your US LLC for resale, the price you charge must be reasonable and comparable to what you would charge an independent third party.
Why this matters: The IRS uses transfer pricing rules to prevent profit shifting (artificially reducing US taxable income by overcharging the US entity). Incorrect transfer pricing can lead to audits, penalties, and back taxes.
Why Foreign Vendors Need Transfer Pricing Documentation
- Required for IRS Form 5472 filing (foreign-owned disregarded LLCs)
- Avoid IRS penalties ($25,000+ per form per year for non-compliance)
- Document arms-length pricing for intercompany transactions
- Defend pricing in IRS audits with contemporaneous documentation
- Reduce risk of transfer pricing adjustments and double taxation
- Comply with US tax law for foreign-owned entities
- Establish defensible pricing methodology
- Avoid profit-shifting accusations from IRS
IRS Form 5472 Requirement
If your US LLC is owned by a foreign person or entity (25%+), you must file IRS Form 5472 annually with your Form 1120 tax return. This form reports all transactions with related foreign parties.
- Penalty for Non-Filing: $25,000 per form per year, plus criminal penalties for willful failure
- Due Date: Same as corporate tax return (Form 1120) - 15th day of 4th month after tax year end
- Reportable Transactions: Sales, purchases, rents, royalties, commissions, loans, guarantees, and other related-party transactions
Common Intercompany Transactions Requiring Transfer Pricing
Product Purchases
Foreign factory → US LLC product sales
Pricing must reflect market value (cost + reasonable markup)
Service Fees
Management, consulting, or technical services
Must be documented with service agreements and invoices
Royalty Payments
Trademark, patent, or intellectual property licensing
Royalty rates must be comparable to market rates (2-10% typical)
Loans & Guarantees
Intercompany loans or loan guarantees
Interest rates must be arms-length (comparable to bank rates)
IRS-Approved Transfer Pricing Methods
Comparable Uncontrolled Price (CUP)
Compare your intercompany price to the price charged to unrelated third parties for the same product. Best method if comparable transactions exist.
Resale Price Method
Start with the resale price to customers, subtract a reasonable gross margin for the US LLC. Commonly used for distributors and resellers.
Cost Plus Method
Start with production cost, add a reasonable markup (profit margin). Commonly used for manufacturers selling to related distributors.
Transactional Net Margin Method (TNMM)
Compare net profit margin to industry comparables. Used when other methods don't apply. Requires industry benchmarking data.
Transfer Pricing Services Coordinated by Market Express
- Transfer pricing study and documentation
- Arms-length pricing analysis and benchmarking
- Transfer pricing policy development
- IRS Form 5472 preparation and filing
- Intercompany agreement templates
- Industry comparable analysis
- Audit defense support
- Coordination with international tax professionals
Transfer Pricing Documentation Timeline
- Before First Transaction: Establish transfer pricing policy and intercompany agreements
- Quarterly: Review transactions and update documentation as needed
- Annually: Prepare transfer pricing study and file Form 5472 with Form 1120 tax return
- Contemporaneous Documentation: Must be prepared at the time transactions occur (not after IRS audit)
Important Information
- Service Partner Coordination: Market Express coordinates with international tax professionals but does not provide tax or legal advice directly
- Required for Foreign-Owned LLCs: If your LLC is 25%+ foreign-owned, Form 5472 and transfer pricing documentation is mandatory
- Penalties Are Severe: $25,000+ per form per year plus interest and potential criminal charges for willful non-compliance
- Contemporaneous Documentation: Documentation must be prepared before or at the time of transactions, not after IRS inquiry
- Professional Guidance Recommended: Transfer pricing is complex - work with qualified international tax professionals
Example: Transfer Pricing for Auto Parts Vendor
Scenario: Korean auto parts manufacturer owns a Nevada LLC that imports and resells products in the US.
Factory Production Cost: $50 per unit (materials, labor, overhead)
Transfer Price to US LLC: $65 per unit (cost + 30% markup) - arms-length pricing based on industry comparables
US LLC Resale Price: $100 per unit to US customers
Result: Korean factory reports $15 profit, US LLC reports $35 profit. IRS accepts pricing as arms-length with proper documentation.
Ready to Ensure Transfer Pricing Compliance?
Market Express coordinates transfer pricing documentation and IRS Form 5472 compliance for foreign-owned LLCs. Avoid costly penalties with professional guidance.