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Transfer Pricing Considerations

Questions around Transfer Pricing to new US Subsidiary

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Hi AW Crew,

I am a business owner in the UK of a company with a t/o of around £4m, and have a pretty good handle on the UK side of finance. However, we are about to set up a US subsidiary to enable us to trade with a major US retailer, but I am having trouble with transfer pricing of our products. I have spoken to several US accounting companies, and been hit with the scare tactics and over quoting as is customary, so I was wondering whether you folks had any good resources that you could point me to? The business set up is really quite simple as below:

 

1) UK Ltd manufactures finished goods (same as the products that are sold in the UK)

2) US Corp purchases finished goods and arranges (and pays for) transport and import costs

3) US Corp sells goods onto US retailer

There are no employees, no offices, just stock being held in a warehouse on the West Coast waiting to be sent to the retailer. All management is done by UK Ltd, the US Corp is effectively a virtual company to enable us to sell to the US retailers as they don't work with foreign entities. US Corp costs are minimal- just the inbound and outbound transportation, a couple of marketing costs and some insurance and compliance costs. I am just struggling to get to the point of deciding how much the UK needs to charge the US, and how low I can allow the US margin to go as it is obviously more tax efficient to have as much of the profit in the UK as possible due to differing Corp Tax rates.

Any advice, resources or suggestions more than welcome!

Replies (10)

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By paul.benny
11th Oct 2019 11:58

This is a specialised area and I don't think you will find too many people giving free detailed advice.

In general terms, it sounds like in your business model, your US entity is what is known in the jargon as a 'limited risk distributor' (ie most of the risks such as warranty/product liability, credit, product development remain with the manufacturer).

Your US entity should be earning the sort of margins that third party distributor would earn taking account of the degree of risk that your company is doing.

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Replying to paul.benny:
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By eclipse15000
11th Oct 2019 12:08

Quote:

This is a specialised area and I don't think you will find too many people giving free detailed advice.

No, I agree. I am surprised about how specialised it is however, as I would have though foreign subsidiaries are a fairly standard aspect of global business now.

A limited risk distributor model is the one that has come up more often than anything else so far.

If anyone has any UK based contacts on this sort of thing, I would be very interested- the US are proving quite tricky to deal with for this stuck up Brit!

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Replying to eclipse15000:
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By johnt27
11th Oct 2019 12:40

It's a specialist area because the US is a minefield for business, despite how easy it is perceived to be - it's the reason US accountants put extra 00's on their fees compared to their UK compatriots!!

Typically when I've dealt with similar situations the UK co has sourced a US distributor and avoided "setting up" in the US. If you want to press ahead you need to consider legal structure, which state/county you set up in (as this will impact on the 3 layers of tax you'll pay - county, state and federal) and then worry about transfer pricing.

The sales of goods across the pond shouldn't be too difficult to manage/calculate, what is more complex will be management/admin time recharged etc. There are also a number of exceptions and exemptions that you'll need specific advise on.

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By eclipse15000
11th Oct 2019 13:21

Unfortunately, the new US entity is a necessity for this one- we are bound by the requirements of the primary customer. Appreciate your comments, thanks.

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By Accountant A
11th Oct 2019 13:05

Quote:

I am surprised about how specialised it is however, as I would have though foreign subsidiaries are a fairly standard aspect of global business now.

Err, not all "foreign subsidiaries" are undertaking precisely the same activities on precisely the same terms so why would there be a one size fits all answer. If you genuinely struggle to see that then you should seek expert advice as a matter of urgency.

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Replying to Accountant A:
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By eclipse15000
11th Oct 2019 13:20

Quote:

Quote:

I am surprised about how specialised it is however, as I would have though foreign subsidiaries are a fairly standard aspect of global business now.

Err, not all "foreign subsidiaries" are undertaking precisely the same activities on precisely the same terms so why would there be a one size fits all answer. If you genuinely struggle to see that then you should seek expert advice as a matter of urgency.


Not sure the pseudo sarcastic approach is necessary. I have stated that I am obviously willing to get advice, I would just like to be armed with the correct information and a level of understanding before I approach it.

I also expressed surprise, not expectation, certainly not for a “one size fits all” answer.

Thanks for your “input”

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Replying to eclipse15000:
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By paul.benny
11th Oct 2019 13:28

One of the reasons it's specialised because it varies according to the type of goods/services being supplied cross-border - for pharmaceuticals, for example, it's necessary to consider regulatory approvals, patents, manufacturing know-how, branding and doubtless more. Many businesses try to manage their tax burden by having IP owned in a low-tax country, which adds to the degree of complexity.

Given the scale of activity you mention, it may be simpler and cheaper to use a local distributor rather than having to bear compliance costs yourself.

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Replying to paul.benny:
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By eclipse15000
11th Oct 2019 13:42

Many thanks for your comments. We aren’t in quite as a strongly regulated industry as medicine thankfully. Unfortunately, our primary customer will not allow us to go via a distributor, so a US entity is a necessity.

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Replying to eclipse15000:
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By paul.benny
11th Oct 2019 14:05

If a US entity is essential, you might want to consider whether the potential earnings from this customer (and the US more widely) are enough to justify the compliance costs. It's a hard choice to say no to business - and this may be more about the medium term potential rather than the immediate profitability.

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Psycho
By Wilson Philips
11th Oct 2019 14:02

Transfer pricing isn’t, as others have already mentioned, your only concern. You’ll need to think about double taxation and tax residency.

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