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Some Puerto Rico companies that obtain tax incentives are paid to perform management or other consulting services for companies they own and maintain outside of the Commonwealth of Puerto Rico. In these cases, transfer pricing issues may occur, as the rate paid from one company you own to another company you own must be shown to be reasonable. This test for reasonableness of pricing is known as the “arm’s length” test. The price should fall within the range of what unrelated parties would charge in similar circumstances.
Transfer Pricing Study
Our CPA can help you assess whether this might apply to you. They may advise you to commission a Transfer Pricing Study; this would be performed by a third party consulting firm, and generally costs $15,000-$25,000. It also would need to be refreshed periodically. The consulting firm would analyze your business and identify comparable businesses in the same market to determine a fair market price for your services.
If you do need a Transfer Pricing Study, our company can identify an appropriate vendor and manage this process for you.
If you maintain ownership of a mainland business which performs services for a Puerto Rico company that you also own, an IRS audit could result transfer pricing findings in conjunction with Puerto Rico’s tax incentives if the IRS judges that the fees paid to your Puerto Rico company are not reasonable in the marketplace. Having record of a Transfer Pricing Study to back up your decisions does not prevent the IRS from investigating you, and it is no guarantee that you won’t be handed a bill for additional tax owed. However, having the transfer pricing study and showing that you set your prices according to it can go a long way in helping you defend your decisions, and the audit may be a shorter and less painful process.
We always advise our clients to assume that an audit will happen at some point and to plan for it, rather than hoping it won’t happen. While it is not illegal to set prices without considering the arm’s length principle, this approach does risk fines and back taxes owed at some future date.
We can assist you in finding qualified advisers in this matter, and in commissioning a Transfer Pricing Study if it is right for your situation.
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Our company helps people like you take advantage of Puerto Rico’s excellent tax incentives! We can help you determine which tax incentives are right for you, help you plan your residency and relocation strategy, and simplify the entire process for you.
Contact us for a free initial consultation.
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