As governments worldwide struggle with record deficits and declining tax revenues, the pressure to generate more taxes is leading to increased scrutiny of multinational firms’ transfer-pricing methods by the Internal Revenue Service and foreign tax authorities.The crackdown on transfer pricing—the pricing of goods or services one unit of a company provides to another unit—comes with hefty penalties, says Horacio Peña, senior economist at PricewaterhouseCoopers. Penalties can hit 40% in the United States and go as high as 100% in Mexico and the U.K., Peña says. Developing nations are also getting into the act, including China, India and Brazil.
Steven Fortier, a principal at KPMG, says transfer pricing has become a “hot-button issue,” with corporate tax experts trying to reduce the risk of double taxation. A big focus in both the U.S. and Canada is outbound royalties, according to KPMG.