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Transfer pricing question for US company (inbound rentals)
Posted on 11/19/18 at 3:31 pm
Posted on 11/19/18 at 3:31 pm
I work for a fairly small oil & gas service company (40 employees in US entity) that is headquartered in Europe. Over the past 10 years, we've had many ups and downs that mostly mirror the market combined with breaking in new technology into the US onshore market (and a little offshore).
A significant portion of our overall costs are the intercompany equipment rentals required to perform the jobs. These are not sold on the open market and it has been difficult to substantiate the monthly rental amounts due to lack of public comparisons being available. Even a well regarded transfer pricing consulting group struggled a bit when we had them build a file for us 5+ years ago.
The European entity that owns the tools leases them out to many other global regions. Historically, the lease prices have been the same for each region. When the market started to rebound in the past couple of years, our US entity was able to maintain pricing while other regions (such as Middle East) drastically lowered it to compete with competitors.
Now, our Corporate group has decided that it will significantly increase our US equipment rates since we're making better than expected profit while the other regions will remain the same or be decreased. I think this was reviewed with a Big 4 European group but not necessarily from a US tax (transfer pricing) point of view.
Does anyone have any experience in this area or have advice based on this brief background of my organization?
A significant portion of our overall costs are the intercompany equipment rentals required to perform the jobs. These are not sold on the open market and it has been difficult to substantiate the monthly rental amounts due to lack of public comparisons being available. Even a well regarded transfer pricing consulting group struggled a bit when we had them build a file for us 5+ years ago.
The European entity that owns the tools leases them out to many other global regions. Historically, the lease prices have been the same for each region. When the market started to rebound in the past couple of years, our US entity was able to maintain pricing while other regions (such as Middle East) drastically lowered it to compete with competitors.
Now, our Corporate group has decided that it will significantly increase our US equipment rates since we're making better than expected profit while the other regions will remain the same or be decreased. I think this was reviewed with a Big 4 European group but not necessarily from a US tax (transfer pricing) point of view.
Does anyone have any experience in this area or have advice based on this brief background of my organization?
1
Posted on 11/20/18 at 8:50 pm to litenin
Caveat that I work for big4, have interacted with our transfer pricing group but am no TP expert.
It’s generally accepted to have a standard TP policy (a lot of internationals use big4 to establish their policies but they certainly need refreshing as regulations change over time) which has thoroughly evaluated the tax environment of each country in which you operate. This can help establish TP rates and IC charges that allow companies to pay their taxes in the countries with the lowest rates.
I would imagine the US has lower tax rates than Europe and it would be more advantageous to pay the taxes here.
Why does this matter to you as a foreign subsidiary, bonuses tied to profitability? What are you hoping to accomplish with this change?
It’s generally accepted to have a standard TP policy (a lot of internationals use big4 to establish their policies but they certainly need refreshing as regulations change over time) which has thoroughly evaluated the tax environment of each country in which you operate. This can help establish TP rates and IC charges that allow companies to pay their taxes in the countries with the lowest rates.
I would imagine the US has lower tax rates than Europe and it would be more advantageous to pay the taxes here.
Why does this matter to you as a foreign subsidiary, bonuses tied to profitability? What are you hoping to accomplish with this change?
Posted on 11/26/18 at 9:13 am to Larry Gooseman
All of the bonus schemes exclude these intercompany rentals (both in US and European parent) so no impact there. I think the primary reason is to align the rental costs for each region to the region's overall market for our particular tool/service. When the downturn happened, areas like the Middle East cut pricing drastically while the US was able to drop only slightly. Our US profitability is based on volume/utilization and we've been seeing a very high volume of activity in 2018, hence the proposed increase in rental rates.
Our US entity also has an NOL that we will be using a big chunk of in 2018. It 'would have' likely been fully used in 2019 but these increases in rental rates will allow us to not have to pay any federal taxes for an additional year or two.
Thank you for the response as I am just seeing it now. I realize TP can be complex and wasn't looking for an exact answer but the feedback was helpful. I see that you live in the Heights, we lived there (near Shepherd/11th) in the early 2000s.
Our US entity also has an NOL that we will be using a big chunk of in 2018. It 'would have' likely been fully used in 2019 but these increases in rental rates will allow us to not have to pay any federal taxes for an additional year or two.
Thank you for the response as I am just seeing it now. I realize TP can be complex and wasn't looking for an exact answer but the feedback was helpful. I see that you live in the Heights, we lived there (near Shepherd/11th) in the early 2000s.
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