What is Transfer Pricing?
Transfer pricing refers to the pricing of goods, services, and intangibles between related entities within a multinational enterprise (MNE). It ensures that intra-group transactions reflect the arm’s length principle — i.e., pricing as if the transaction happened between unrelated parties.
In the United States, transfer pricing is governed by Section 482 of the Internal Revenue Code (IRC) and enforced by the Internal Revenue Service (IRS).
When is Transfer Pricing Applicable?
Transfer pricing rules apply when:
A U.S. entity transacts with foreign or domestic related parties
Transactions include goods, services, IP, financing, or cost sharing
The pricing affects the U.S. taxable income
Examples:
U.S. parent sells products to its EU subsidiary
U.S. subsidiary licenses software from its Singapore headquarters
Group treasury provides intercompany loans
Transfer Pricing Methods Accepted by the IRS
The IRS accepts several OECD-aligned methods to determine arm’s length pricing:
Traditional Transaction Methods
Comparable Uncontrolled Price (CUP)
Resale Price Method
Cost Plus Method
Transactional Profit Methods
Comparable Profits Method (CPM) – Most commonly used in the U.S.
Profit Split Method
Transactional Net Margin Method (TNMM)
Best Method Rule: The most reliable method based on facts, functions, and data must be selected.
Transfer Pricing Documentation Requirements in the U.S.
Under IRC §6662(e), U.S. taxpayers must prepare contemporaneous transfer pricing documentation, which should include:
Description of the entity and group structure
Functional and risk analysis
Description of controlled transactions
Method selection rationale
Benchmarking and comparables analysis
Key 2025 Transfer Pricing Developments in the U.S.
Global Minimum Tax & Pillar Two
U.S. GILTI regime evolving to align with OECD’s 15% global minimum tax.
Affects U.S. MNEs with foreign subsidiaries in low-tax countries.
Increased IRS Scrutiny & TP Audits
Focused audits on:
Cost-sharing arrangements
IP migration
Distribution entities with low profit margins
Intercompany loans and financial guarantees
Advance Pricing Agreements (APA) Surge
Record number of bilateral APAs filed in 2024–25, especially with:
Japan
UK
Germany
APAs provide certainty and avoid costly disputes.
Digital Economy & Intangibles
High scrutiny on:
DEMPE analysis (Development, Enhancement, Maintenance, Protection, Exploitation)
Digital IP structures
Platform and user-data monetization
U.S. Transfer Pricing vs. Global Rules (OECD)
Aspect | U.S. Approach | OECD Guidelines |
Governing Law | IRC §482 | OECD TP Guidelines (2022–2025) |
Most Used Method | CPM | TNMM / Profit Split |
Documentation Requirement | Mandatory (IRC §6662) | Master file, local file, CbCR |
Penalties | 20–40% | Country-dependent |
Pillar One/Two Compliance | GILTI + potential Pillar 2 alignment | In implementation phase |
Future of Transfer Pricing in the U.S. (2025–26 Outlook)
Stronger push for tax transparency
Increasing relevance of CbCR (Country-by-Country Reporting)
IRS use of AI tools and data analytics in TP enforcement
Cross-border dispute resolution through MAP (Mutual Agreement Procedures)
Upcoming updates to cost-sharing regulations and profit split methods
Conclusion
The U.S. transfer pricing landscape is becoming more integrated with OECD global standards while retaining its own robust enforcement framework. With regulatory convergence, digital economy taxation, and GloBE rules taking center stage, MNEs must proactively manage TP risk.
