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Essential Guide to Transfer Pricing for Your Multinational Business

his article is part of an ongoing series, “Navigating the Complexities of Setting Up a Business in the USA“. View all the articles in the series here.

Key Takeaways:

Implementing effective transfer pricing strategies is essential for regulatory compliance and optimizing your tax position in the U.S.
Transfer pricing helps intercompany transactions align with the arm’s length principle, preventing double taxation and mitigating tax risks.
Meticulous documentation and regularly updated policies are key to maintaining compliance with transfer pricing regulations.

As a multinational enterprise setting up operations in the United States, it is imperative for you to understand the complexities of transfer pricing and intercompany transactions. Effective transfer pricing strategies will help you meet regulatory compliance and improve your tax position.

Fundamentals of Transfer Pricing

Transfer pricing involves setting prices between related entities for transactions — such as the purchase or sale of goods, provision of services, performance of manufacturing activities, cost allocation, or use of intellectual property. This practice of “negotiating” prices between related entities ensures transactions are conducted at “arm’s length”, meaning the prices are consistent with those charged between independent parties. Proper transfer pricing can help you avoid double taxation, mitigate tax risks, and follow U.S. laws.

It is important to note that “related entities” for these purposes involve the concepts of both common ownership and common control. Many taxpayers who fail to understand these concepts also fail to properly address transfer pricing rules and regulations for various transactions.

Regulatory Requirements

IRS Guidelines on Transfer Pricing

The Internal Revenue Service (IRS) provides detailed guidelines on transfer pricing to promote fair pricing practices. These guidelines require businesses to apply the arm’s length principle and provide adequate documentation to justify pricing methods.

Documentation and Compliance

Compliance with U.S. transfer pricing regulations involves meticulous documentation. Companies must prepare and keep detailed records of intercompany transactions — including the rationale for pricing decisions, application of the best method, and evidence that prices meet arm’s length standards. Non-compliance can lead to substantial penalties and adjustments imposed by the IRS.

Setting Up Transfer Pricing Policies

Establishing effective transfer pricing policies requires a thorough understanding of the business model, industry standards, and regulatory requirements. Your company should develop policies that align with the arm’s length principle and keep consistency across all intercompany transactions. Additionally, you should continuously check and update these policies to adapt to any changes in business operations and tax regulations.

For further insights into developing robust transfer pricing strategies, explore our case study on global transfer pricing for a semiconductor leader.

Real-World Transfer Pricing Strategies

Examining real-world examples can offer valuable insights into effective transfer pricing strategies.

Example 1: Goods Transfer

A multinational company based in the United Kingdom sets up a U.S. subsidiary to handle distribution. To follow transfer pricing regulations, the company conducts a thorough analysis to decide proper prices for goods transferred to the U.S. entity, verifying the profitability of the U.S. entity is appropriate.

Example 2: Service Provision

A Japanese company provides technical support services to its U.S. subsidiary. By documenting the cost-plus method, where a markup is added to the costs incurred in providing the services, the company shows compliance with the arm’s length principle.

Example 3: Intellectual Property Licensing

A German firm licenses its proprietary software to a U.S. branch. The firm conducts a detailed analysis to decide the right royalty rate, confirming the transaction meets IRS guidelines and minimizes tax liabilities.

Optimizing Your Transfer Pricing Approach

For multinational businesses moving into the U.S. market, it is vital to understand and implement effective transfer pricing strategies to assist with regulatory compliance, improve tax positions, and support seamless intercompany transactions.

Even if your business is familiar with Organization for Economic Co-operation and Development (OECD) transfer pricing guidelines or currently operates in a country that mirrors them, you need to know the subtleties that may occur should the IRS review your related-party transactions. The IRS will generally abide by U.S. transfer pricing principles without consideration of OECD guidelines. Understanding the differences may help you avoid headaches and create a consistent approach throughout your organization worldwide.

If your business is navigating the complexities of transfer pricing, professional advice and tailored strategies are recommended. For detailed guidance and personalized support, reach out to our International Tax team today.

Setting up a business in the U.S. requires thorough planning and an understanding of various regulatory and operational challenges. This series will delve into specific aspects of this process, providing detailed guidance and practical tips. Our next article will discuss operational strategies for a successful expansion.

CFOs: Prepare Your Company for IRS Transfer Pricing Audits and Mitigate Risk

Key Takeaways:

Transfer pricing is an increasing area of focus for tax authorities, requiring CFOs to adopt more strategic audit preparation.
Proactive measures like pre-audit reviews, voluntary disclosures, and benchmarking are crucial for companies to defend transfer pricing policies and minimize risks.
Prioritizing high-value transactions, collaborating with tax professionals, and leveraging technology are essential to stay ahead of evolving transfer pricing regulations and potential audits.

In today’s global tax environment, transfer pricing has become a critical focus for tax authorities. With multinational companies operating across multiple jurisdictions, tax authorities are intensifying their efforts to scrutinize transfer pricing practices and confirm that profits are appropriately distributed and taxed in their jurisdictions. This growing focus requires chief financial officers (CFOs) and tax executives to shift from compliance alone to comprehensive audit preparation and strategic risk management.

From Compliance to Audit Readiness

While transfer pricing compliance has always been important, the increasing focus on audit enforcement is changing the landscape. It is no longer enough to simply have policies in place; your company needs to be prepared to defend them under rigorous examination. This shift highlights the importance of proactively managing transfer pricing risk and preparing for potential audits.

Risk management and audit preparation efforts include:

Pre-audit reviews — Conducting periodic pre-audit reviews is essential. These reviews offer an opportunity to examine your transfer pricing documentation and policies to confirm the pricing of all intercompany transactions is supported by clear agreements. It is important the documentation reflects an arm’s length standard and is presented in a way that would stand up to an audit. Showing gaps, inconsistencies, or potential weaknesses early on allows your company to address them before tax authorities intervene.
Voluntary disclosures — In cases where pre-audit reviews reveal potential issues, voluntary disclosures can be a valuable tool. If discrepancies are found, making voluntary disclosures to tax authorities can sometimes lead to more favorable outcomes as it shows good faith and a proactive approach to compliance. It also demonstrates your company has a level of sophistication in overall global financial hygiene. This strategy can help you avoid more severe penalties that may arise from issues discovered during an Internal Revenue Service (IRS) or foreign jurisdiction audit.
Benchmarking — Benchmarking and testing are also key components of audit preparedness. Your company should consistently review its transfer pricing policies and test them against current market conditions. This is particularly important when there are economic shifts or significant changes in business operations — such as the introduction of new products, services, or intangible assets. By regularly benchmarking intercompany pricing, your company can support alignment with the arm’s length principle and minimize risk during an audit.

The Role of CFOs in Managing Transfer Pricing Risk

For CFOs, transfer pricing audits are a significant financial risk. These audits can result in tax adjustments and penalties. They can also lead to reputational damage if issues are not handled properly and with sufficient expeditiousness. CFOs together with their tax advisors play a significant role in mitigating this risk by taking a strategic approach to audit readiness and documentation.

Key areas of focus for CFOs include:

High-value transactions — A top priority for CFOs should be focusing on high-value transactions. Not all intercompany transactions carry the same level of risk, and those involving intangible assets, intellectual property, or complex financial arrangements tend to receive the most scrutiny from tax authorities. It is important to thoroughly document and benchmark these transactions to avoid potential challenges during an audit.
Tax professionals — Another critical element of risk management is collaborating with tax professionals. Transfer pricing rules can vary significantly across jurisdictions, and tax advisors are well-versed in the specific requirements and regulations in various countries. Working closely with these advisors enables your company to adapt its transfer pricing policies to standards and minimize exposure to risk.
Voluntary compliance programs — In some cases, companies may receive help by entering voluntary compliance programs — such as advance pricing agreements (APAs). These agreements allow your company to gain certainty over transfer pricing arrangements by agreeing to terms with tax authorities in advance. For high-risk transactions or operations in high-risk jurisdictions, APAs can provide a level of protection from future audits and disputes.

Proactive Risk Management in Transfer Pricing

The global tax landscape continues to evolve as regulatory authorities refine their approaches to transfer pricing audits and enforcement. For mid-market companies with limited resources, it is particularly important to strike the right balance between compliance and cost-efficiency. This requires a proactive approach to transfer pricing risk management that combines audit readiness with strategic planning.

Steps for proactive risk management include:

Audit-ready documentation — The first step in proactive risk management is building audit-ready documentation. This includes keeping detailed records of all intercompany transactions, agreements, and financial data that support the arm’s length nature of pricing decisions. Regularly reviewing and updating this documentation helps your company stay prepared for potential audits.
Regular market testing — Beyond documentation, CFOs should incorporate benchmarking and market testing into risk management strategies. By continuously checking how your pricing compares to the market, your company can stay aligned with the arm’s length principle and minimize exposure to tax adjustments. Regular testing can also help you find potential discrepancies before they become audit issues.
Automated solutions — Finally, using technology to enhance efficiency and accuracy in transfer pricing documentation and analysis is essential. Automated solutions and data analytics offer the ability to quickly find risks, prioritize compliance efforts, and streamline the process of audit preparation.

Keeping Your Company Ahead of the Transfer Pricing Curve

In an era of increased scrutiny and regulatory pressure, transfer pricing compliance is a priority for multinational companies. For CFOs and tax executives, the challenge lies not just in keeping compliant but in preparing for audits and managing the associated risks. Proactive risk management, strategic audit readiness, and a careful focus on high-value transactions are critical components in navigating this complex landscape.

By focusing on audit preparedness, keeping documentation up-to-date, and collaborating with local tax professionals, you can position your company to minimize tax adjustments, penalties, and disputes. As transfer pricing rules continue to evolve, staying ahead of the curve with a forward-thinking strategy is essential for supporting compliance and reducing financial risks.

How MGO Can Help

Our International Tax team is here to help you navigate the new transfer pricing landscape. We can assist you in both broad and focused areas, providing guidance to meet your specific transfer pricing needs. Our services include:

IRS Pre CheckUP — We help you identify and rectify potential weaknesses in transfer pricing and international tax documentation and practices before facing an actual IRS audit.
Review of:
Cross-border agreements for U.S. tax updates
Benchmark data sets
Transfer pricing documentation
U.S. tax returns to confirm consistency with transfer pricing documentation and policies, as well as withholding practices

Protect your company from costly adjustments and penalties — reach out to our team today.

Choosing the Right Business Structure for Your U.S. Expansion

This article is part of an ongoing series, “Navigating the Complexities of Setting Up a Business in the USA“. View all the articles in the series here.

Key Takeaways:

Assess different business structures to find the best fit for your U.S. operations and strategic goals.
Understand how each entity type affects your tax obligations and benefits.
Look for legal and tax advice to navigate complex regulations and improve your business setup.

Choosing the right business structure is a critical step in setting up your U.S. operations. The structure you select will affect your tax obligations, legal liability, and potential to raise capital. Additionally, the entity you choose may impact your day-to-day business operations and long-term strategic goals.

Importance of Selecting the Appropriate Business Entity

Selecting the right business entity affects everything from how profits are taxed to the level of personal liability for owners. It also dictates the regulatory requirements you must follow — which can vary significantly depending on the chosen structure.

Types of Business Entities

The main types of business entities available in the U.S. include:

C Corporation (C-Corp) — A standard corporation subject to corporate income tax. This structure is beneficial for businesses that plan to reinvest profits into the company or seek public investment.

Limited Liability Company (LLC) — A flexible entity that can be taxed as a sole proprietorship, partnership, or corporation. It offers liability protection while providing tax flexibility.

Foreign corporation with or without a U.S. branch — This setup allows a foreign company to do business in the U.S. without forming a separate legal entity. However, it comes with its own set of tax and legal considerations. It is crucial to consider both sides of the equation when deciding the entity structure, as cross-border operations can be complex and require careful planning.

Keys Factors to Consider When Selecting an Entity.

When choosing a business structure, consider the following:

Tax implications — Different structures have varying tax rates and filing requirements
Legal considerations — The level of liability protection varies by entity type. C-Corps and LLCs generally offer more protection against personal liability than sole proprietorships or partnerships
Operational needs — Consider how the chosen structure will affect your business operations. For instance, C-Corps can raise capital more easily through stock sales, while LLCs offer greater flexibility in management and profit distribution. Additionally, forming a U.S. entity may simplify transactions with other U.S. businesses versus operating as a foreign corporation with a U.S. branch.

Making the Right Entity Decision for Your U.S. Expansion

Selecting the right business entity is crucial for the success of your U.S. operations. To determine what the right entity is for you, it is important to evaluate all factors — including tax implications, legal protections, and operational needs. Consulting with legal and tax professionals can help you make an informed decision that aligns with your business goals.

Need help choosing the right business structure for your U.S. expansion? Reach out to our International Tax team today to get professional guidance tailored to your specific needs.

Navigating Pillar Two and Supply Chain Challenges for Your Global Business

Key Takeaways:

The OECD’s Pillar Two rules are pushing large multinational enterprises to restructure and rethink location strategies to navigate the 15% global minimum tax more effectively.

AI and digital tools are revolutionizing supply chain operations, enabling you to make faster decisions and drive your efficiency while meeting ESG reporting requirements.

An increasing number of multinational enterprises are planning major business model overhauls in response to Pillar Two’s growing influence on tax, operational, and geographical strategies.

If you act early to integrate Pillar Two considerations into your strategic planning, you could avoid unforeseen costs and position your business for long-term success in what will continue to be a complex global landscape.

Throughout the last few years, the global business landscape has been rocked by a series of unprecedented disruptions affecting supply chains and operating models. From natural disasters like the Fukushima earthquake to geopolitical tensions and the COVID-19 pandemic, businesses like yours have no doubt been forced to reevaluate and adapt strategies to maintain efficiency and meet evolving customer expectations. 

It is likely that these disruptions have prompted you to diversify your sourcing, move your manufacturing closer to markets, and adopt a more regionalized supply chain model with an increased reliance on artificial intelligence (AI) and digital tools for more rapid supply chain decision-making and environmental, social, and governance (ESG) reporting.

While Pillar Two considerations were not the primary driver of these types of transformations, they have started to influence corporate strategies — including business model revisions, supply chain alterations, and legal entity restructuring as companies assess the tax implications and integrate them into business cases.

How You Can Respond to the Disruption

In response to these supply chain challenges, businesses have taken to adopting other strategies to stay nimble. Here are some things you can do:

Diversify your supply sources: Companies are moving their sourcing and manufacturing closer to their markets to increase supply chain diversity and provide greater market responsiveness.

Reduce your dependence on China: There has already been a noticeable shift away from the country as the primary manufacturing base.

Look at nearshoring and onshoring: This can bring your manufacturing closer to end markets and decrease your transportation costs.

Consider digitalization: Using AI and digital technologies can accelerate your decision-making, as well as enhance supply chain efficiencies.

Transform your supply chain: Companies are revising their supply chains to mitigate tariffs, optimize green credits, and meet ESG reporting requirements.

The Role Pillar Two Plays in Your Business

The Pillar Two model rules, also referred to as the Global Anti-Base Erosion (GloBE) rules, were released on December 20, 2021, and are part of the Organisation for Economic Co-operation and Development‘s (OECD’s) two-pillar solution to address the tax challenges of the digitalization of the economy that was agreed to by 137 jurisdictions and endorsed by the G20 finance ministers in October 2021. They were designed to ensure that large multinational enterprises (MNEs) are subject to a minimum effective tax rate of 15% on the income arising in each jurisdiction where they operate.

The OECD’s global minimum tax rules apply to MNEs with revenue of at least EUR 750 million and are not self-implementing. Each jurisdiction must enact them into their domestic legislation. Some jurisdictions have already issued legislation to enact the global minimum tax, but others are still enacting legislation. You can track the status of this implementation here.

You are most likely navigating a complex landscape of challenges that include the green transition, digital transformation, geopolitical tensions, talent shortages, and supply chain disruptions. The Pillar Two tax reforms intersect with these issues, meaning you need to take a comprehensive approach to guard your strategies and operations across your people, processes, and technology. You can respond to these disruptions in a myriad of ways, from adjusting your supply chains to overhauling your recruitment strategies to even making fundamental shifts in your business models.

You’ve probably seen firsthand how the rise of digitization has driven more commerce online, fostering new platforms and subscription-based models. In that same vein, the increasing emphasis on sustainability and ESG factors is prompting organizations to reevaluate their core objectives and metrics of success. From this angle, Pillar Two is emerging as a significant consideration factor in your transformation.

While it is not quite a catalyst yet, it is gaining influence around operational restructuring and relocation, with an increasing percentage of MNEs planning major structural changes due to Pillar Two. Because of this new tax landscape, you will have to reassess the optimal locations for their people, functions, assets, and risks, as you may no longer see a strong business case to centralize in one location to obtain very low tax rates via incentives.

Pillar Two is becoming more prominent as a cost factor due to its potential to increase costs and impact strategic plans. MNEs anticipate a significant rise in effective tax rates due to it, which can add to the already existing cost pressures. If you fail to incorporate Pillar Two considerations into your strategic planning, you’ll likely be impacted by unforeseen costs and erode your profitability. That is why it is key to take early action on implementation — you’ll be setting yourself up for a competitive advantage.

How MGO Can Help

The supply chain landscape and operating model disruption are complex and will continue to evolve. MGO can help you take an integrated approach to adapt to these changes. Our experienced team will consider the location of your people, functions, assets, and risks to diversify your supply sources, leverage digital technologies, and adapt your overall strategies in response to the environmental, social, and regulatory changes.

As the shift towards decentralized, regional hub models continue to gain traction, we can assist you in moving away from the traditional centralized models to enhance your flexibility and resilience. Let us tackle the additional layer of complexity Pillar Two adds as we reassess your operations and strategies holistically. As you move forward, your success will hinge on your ability to adapt and innovate in the face of these disruptions, and we can help set you up for long-term success and sustainability.

To learn how we can help you address supply chain challenges and Pillar Two tax implications, reach our to our International Tax team today.

Understanding U.S. Taxes for Your Foreign Business

This article is part of an ongoing series, “Navigating the Complexities of Setting Up a Business in the USA“. View all the articles in the series here.

Key Takeaways:

Follow U.S. tax requirements by understanding federal, state, and local obligations.

Adjust your business strategy for the U.S. market by accounting for sales tax variations.

Utilize tax treaties to minimize tax burdens and navigate international tax rules effectively.

Navigating the U.S. tax system is a critical aspect of doing business in the United States. Unlike other countries with a single national tax system, the U.S. has a multi-layered structure that includes federal, state, and local taxes. Each layer has its own set of regulations and compliance requirements, which can be varied and complex.

For foreign businesses, this system can be challenging — especially if you are accustomed to a more centralized tax framework. In the U.S., tax obligations can arise not only from physical presence but also from sales or services delivered into a state, requiring your business to report to multiple agencies. It is important to recognize these distinctions for both compliance and tax strategy.

Federal Tax Obligations

What creates a taxable presence for federal income taxes is uniform across the country. Your business must file annual income tax returns with the Internal Revenue Service (IRS), detailing your income, expenses, and tax liabilities. Federal taxes include corporate income taxes, certain payroll taxes, and other specific levies.

While federal taxes are uniform across the country, they may be overridden by an enforceable income tax treaty (more on those below). The uniformity of federal taxation is also, unfortunately, not consistent for state taxation.

State and Local Tax Considerations

State and local taxes vary significantly across the U.S. Individual states can impose income taxes, sales taxes, property taxes, and other business-related taxes on your company. The complexity is further compounded by the fact that different authorities may have unique regulations about what triggers tax obligations — such as physical presence, sales volume, or the delivery of services.

The triggers at the state level do not necessarily coincide with the federal triggers. This can be both an opportunity for tax planning for your company and a potential pitfall if you are not careful.

Value-Added Tax Versus Sales Tax

Unlike the value-added tax (VAT) systems in many other countries, the U.S. sales tax system varies widely from state to state. While businesses in places like Europe often deal with a single national VAT system, the U.S. requires navigation through state and local sales tax regulations — each with its own rates and rules, creating a complex compliance landscape.

While VAT is a tax applied at each stage of the supply chain based on the added value, U.S. sales tax is typically collected only at the ultimate point of sale to the end consumer. This distinction can influence pricing strategies, cash flow management, and overall tax planning for your business.

Impact of Income Tax Treaties

Tax treaties between the U.S. and other countries can influence how your foreign business is taxed. These treaties often provide benefits such as reduced tax rates, exemptions from certain taxes, or simplified compliance requirements. However, they require careful navigation for proper application. The presence of a tax treaty between the U.S. and your home country can affect how you should structure your business operations when entering the U.S. market.

Tax treaties aim to avoid double taxation and ease international trade. They typically cover aspects like income tax on royalties, dividends, interest payments, as well as defining what constitutes a taxable presence. Understanding these treaties is essential for improving tax liabilities and staying compliant with regulations in both the U.S. and your home country.

Navigating U.S. Taxes for Your Foreign Business

Successfully managing U.S. taxes requires a comprehensive understanding of federal, state, and local tax obligations, the nuances of sales tax versus VAT, and the strategic use of income tax treaties. To optimize your tax position and minimize compliance risks, you should prioritize thorough planning and seek professional advice.

How MGO Can Help

MGO’s International Tax team can help you navigate these complexities and develop effective strategies for your U.S. operations. Our experienced team can assist you with tax planning, compliance, treaty analysis, and structuring your business for optimal tax efficiency. For more detailed insights and help, reach out to our team today.

Setting up a business in the U.S. requires thorough planning and an understanding of various regulatory and operational challenges. In this series, we will delve into specific aspects of this process, pro

IRS Releases Dual Consolidated Loss Proposed Regulations

Key Takeaways:

The Treasury and IRS released new proposed regulations affecting how dual consolidated losses (DCLs) are calculated and their interaction with the Pillar Two global tax regime.

A new set of rules for disregarded payment losses (DPLs) has been introduced — these apply to disregarded payments deductible in foreign countries, but not included in U.S. taxable income.

The proposed regulations expand the definition of a separate unit and address how foreign tax rules (under Pillar Two) may trigger foreign use restrictions on DCLs.

The Department of the Treasury and the IRS on August 6 released proposed regulations on the dual consolidated loss (DCL) rules and their interaction with the Pillar Two global taxing regime. The proposed regulations also make several changes to how DCLs are calculated and introduce a new disregarded payment loss rule.

DCL Rules

The DCL rules apply to ordinary losses of a dual resident corporation (DRC) or a separate unit. A DRC is either (1) a domestic corporation that is subject to an income tax of a foreign country on its worldwide income or taxed as a resident under the law of that country; or (2) a foreign insurance company that elects to be taxed as a domestic corporation under Internal Revenue Code Section 953(d) and is a member of an affiliated group, even if not subject to tax in the foreign country. A separate unit for purposes of the DCL rules is a foreign branch or hybrid entity that is owned by a domestic corporation. S corporations are not subject to the DCL rules, and domestic corporations will be treated as indirectly owning a separate unit that is owned by a partnership or grantor trust.

Under Section 1503(d), a DCL of a DRC or separate unit generally cannot be used to offset U.S. taxable income of a domestic affiliate (no “domestic use”). This means that the DCL may be used only for U.S. federal income tax purposes against the income of the DRC or separate unit that incurred the DCL.

Some exceptions apply to the domestic use prohibition; for example, a U.S. taxpayer may file a domestic use election and agreement (DUE) certifying that there has not been and will not be any foreign use of the DCL. Foreign use is defined making a portion of the DCL available under a foreign country’s income tax laws to reduce the income of another entity (one that is classified as a foreign corporation for U.S. income tax purposes).

DCLs and Interaction with Pillar Two

The proposed regulations address the coordination between foreign use under the DCL rules and Pillar Two, including expanding the definition of a separate unit to include certain hybrid entities subject to an income inclusion regime (IIR) and foreign branches subject to a qualified domestic minimum top-up tax (QDMTT) or an IIR. More specifically, the proposed rules provide that an income tax for purposes of the DCL rules may include a tax that is a minimum tax computed based on financial accounting principles, such as an IIR or QDMTT. Subject to an exception under the duplicate loss arrangement rules when a double deduction is denied, foreign use could occur if a deduction or loss included in a DCL were used to calculate net GloBE income for an IIR or QDMTT or, alternatively, used to qualify for the transitional CbCR safe harbor. The result of a foreign use would be that no DUE would be permitted to be made to allow for the DCL to be used in the U.S. The proposed rules provide no guidance on the undertaxed profit rules (UTPR).

The proposed regulations also address the concept of “mirror legislation.” The mirror legislation rule under the current DCL rules essentially provides that if the foreign country has its own DCL-type rule that “mirrors” the U.S. rule and that foreign country’s DCL-type rule applies to the loss at issue, then for purposes of the U.S. DCL rules, a foreign use of the DCL will be deemed to occur. The proposed regulations clarify that foreign law, including the GloBE rules, that deny deductions due to the duplicate loss arrangement rules, does not constitute mirror legislation as long as the taxpayer is allowed a choice between domestic or foreign use.

To address legacy DCLs, the proposed regulations provide a transition rule that, subject to an anti-abuse rule, extends the relief given in Notice 2023-80 by treating DCLs incurred in tax years beginning before August 6, 2024, as legacy DCLs and allowing the DCL rules to apply without regard to Pillar Two taxes.

Inclusions Due to Stock Ownership

Under the current DCL rules, U.S. inclusions arising from a separate unit’s ownership in a foreign corporation (such as Subpart F or GILTI) are treated as income and attributable to that separate unit for purposes of determining the income or DCL of that separate unit. This rule also applies to other types of income, such as dividends (including section 1248) and gains from the sale of stock. Under the DCL proposed regulations, with limited exceptions, these types of income (as well as any deductions or losses, such as section 245A dividends received deductions (DRD), attributable to these income items) would be excluded for purposes of calculating a DRC’s or separate unit’s income or DCL.

New Disregarded Payment Loss Rules

The proposed regulations introduce a new set of disregarded payment loss (DPL) rules, which operate independently of the DCL rules. To address certain deduction/non-inclusion outcomes, the DPL rules would apply to some disregarded payments (interest, royalties, and structured payments) that are deductible in a foreign country but are not included in U.S. taxable income because the payments are disregarded.

The DPL rules would require a consenting domestic owner of a disregarded payment entity to include in U.S. taxable income the amount of the DPL of the disregarded payment entity, subject to certain calculation requirements, if one of the following triggering events occur within 60 months: (1) a foreign use of the disregarded payment loss; or (2) failure to comply with certification requirements during the 60-month certification period. A disregarded payment entity is generally a disregarded entity, DRC, or foreign branch.

Since no express statutory authority exists for the new DPL rules, under the proposed regulations, Treasury would implement the DPL rules in coordination with the entity classification election rules under Treas. Reg. §301.7701-3(c), which means that when a specified eligible entity either elects to be disregarded for U.S. tax purposes or defaults to a disregarded entity under the general rules of Treas. Reg. §301.7701-3(b), the domestic owner would be deemed to consent to the new DPL rules. A specified eligible entity is an eligible entity (whether foreign or domestic) that is a foreign tax resident or is owned by a domestic corporation that has a foreign branch. This deemed consent rule would also apply in a situation where a domestic corporation directly or indirectly acquires an interest in a preexisting disregarded entity, as well as a domestic corporation that owns an interest in a disregarded entity by reason of a conversion from a partnership.

The DPL consent rules would apply to new entity classification elections filed on or after the date the proposed DCL rules are finalized and existing entities starting 12 months after the date the proposed regulations are finalized, which would allow taxpayers to restructure their operations before the DPL rules enter into effect.

Intercompany Transactions

The Section 1502 consolidated return regulations provide rules for taking into account certain items of income, gain, deduction, and loss of members from intercompany transactions, essentially treating consolidated group members as separate entities for some purposes and single entities for other purposes. The purpose of the regulations is to provide rules to clearly reflect the taxable income (and tax liability) of the group as a whole by preventing intercompany transactions from creating, accelerating, avoiding, or deferring consolidated taxable income (or consolidated tax liability).

The proposed regulations modify the existing regulations and generally shift application of the regulations to separate-entity treatment. More specifically, if a member of a consolidated group is a DRC or a U.S. member that owns a separate unit, the proposed regulations state that despite Section 1503(d) requiring certain treatment of the member’s tax items, the counterparty consolidated group member’s income or gain on the intercompany transaction will not be deferred. For example, if one member has intercompany loan interest expense that the DCL rules prevent from being deducted, the counterparty member’s interest income would still be included in income.

Additionally, under the proposed regulations, the Section 1503(d) member has special status in applying the DCL rules, which means that if a Section 1503(d) member’s intercompany (or corresponding) loss would otherwise be taken into account in the current year, and if the DCL rules apply to limit the use of that loss (preventing it from being currently deductible), the intercompany transaction regulations would not redetermine that loss as not being subject to the limitation under Section 1503(d). A Section 1503(d) member is an affiliated DRC or an affiliated domestic owner acting through a separate unit.

Books and Records

Under Treas. Reg. Section 1.1503(d)-5, a separate unit’s income or DCL calculation is based generally on items reflected on the separate unit’s books and records as adjusted to conform to U.S. federal income tax principles. As a result, certain transactions, such as transactions between the separate unit and its U.S. owner, are disregarded for purposes of calculating a separate unit’s income or DCL. The proposed regulations clarify that items that are not (and will not be) on the books and records of the separate unit are not included in the separate unit’s income or DCL calculation. This clarification was provided, according to the Treasury, to address positions taxpayers have taken that allocate income on the books and records of the U.S. owner to the separate unit, although those items are not on the books and records of the separate unit.

Applicability

The proposed regulations would generally apply to tax years ending on or after August 6, 2024, except for the intercompany transaction regulations, which would apply to tax years for which the original U.S. income tax return is due without extensions after the date the final DCL regulations are published in the Federal Register. This means that if the final regulations are published by April 15, 2025, they would apply to calendar year 2024. Deemed consent under the DPL rules would apply to tax years ending on or after August 6, 2025.

Once the proposed regulations are finalized, taxpayers can choose to apply them retroactively to open tax years, subject to some consistency requirements.

Insights

The DCL proposed regulations are lengthy and complex and include significant changes that taxpayers should consider now, since many of the changes will apply retroactively to calendar year 2024 once the proposed regulations are finalized.

Taxpayers affected by the proposed regulations should consider the impact these rules may have on their DRCs or separate units, especially since the transitional Pillar Two relief is expected to end soon for many calendar-year and fiscal-year taxpayers.

Taxpayers may need to make adjustments to their DCL calculations going forward to take into account the new rules regarding removing items from the DCL calculation that are not on the separate unit’s books and records and U.S. inclusions, among others. The removal of these items could have a significant effect by unintentionally creating a DCL or increasing the amount of any existing DCL, among other possible upshots.

How MGO Can Help

If the Treasury and the IRS finalize these proposed regulations and you have a multinational company, you may lose the ability to take a U.S. deduction for losses incurred by foreign hybrid entities and foreign branches. If you are affected by the interaction of Pillar Two and the new proposed DCL rules, MGO’s team of experienced international tax advisors can discuss the potential of restructuring to minimize any negative tax consequences. We can also mockup OECD Pillar Two modeling and assist with planning for the overall minimization of your worldwide taxation with income or direct taxes. Our compliance services can help you with your foreign compliance calendars too. Trust us as we dive into the details and limit your global tax rate and overall exposure.

5 Tips for Setting Up Your Business in the U.S.

This article is part of an ongoing series, “Navigating the Complexities of Setting Up a Business in the USA”.

Key Takeaways:

Expand into the U.S. market to access a large and diverse customer base.

Navigate the multi-layered U.S. tax system and adapt to cultural differences.

Choose the right business entity and plan for compliance with U.S. regulations.

Expanding your business into the United States can significantly increase your market share and open the door to new opportunities. However, the process involves navigating a complex landscape of regulations, tax considerations, and operational challenges. This series provides an overview to help you understand how to successfully set up your business in the U.S.

Why Expand to the U.S.?

Expanding into the U.S. market allows you to:

Access a large and diverse customer base.

Leverage the economic scale of the U.S. market.

Explore opportunities for growth and innovation that may not be available in other countries.

Have access to what may be a significant amount of capital (whether this may be equity or debt or other arrangements).

Moving into the U.S. market can help you drive more sales and reach new types of customers. You may also launch new products here that might not succeed in your home market.

5 Key Considerations for Foreign Businesses

When setting up a business in the U.S., you must navigate a range of unique challenges — including:

1. Multi-Layered Tax System

In many countries, businesses deal with a single national tax system where their provinces or states mimic or have congruent rules with federal rules. In contrast, the U.S. has a multi-layered tax system involving federal, state, and local taxes that at many times are not congruent.

When you start a business in the United States you are dealing with 50 states (and the District of Columbia), multiple localities, and certain territories. Each state has its own set of rules and regulations applicable to income taxes, which can be quite different from a single national system (and often at odds with the federal rules).

In addition, state and local jurisdictions impose taxes unique to the state and local level — including sales tax, property tax, and gross receipt tax. Finally, not all states honor the provisions of U.S. tax treaties with foreign countries.

2. Cultural and Business Practice Differences

Understanding and adapting to cultural and business practice differences is crucial. For instance, business practices that are common in Europe or Asia might not be as effective in the U.S. Additionally, legal agreements and formalities that might be less stringent abroad are often necessary in the U.S. to protect business interests.

3. Legal Structure and Entity Choice

Choosing the right business entity is vital as it affects tax obligations, legal liability, and operational flexibility. Options include C corporations (or C corps), limited liability companies (LLCs), foreign corporations with or without U.S. branches, partnerships or joint ventures, or franchising or direct importing. An S corporation (S corp) is not an option for foreign businesses due to ownership restrictions.

Each structure has its own set of advantages and legal implications, which should be carefully considered.

4. Regulatory Compliance

The Corporate Transparency Act is one newly created obligation for all businesses operating in the U.S. Failure to comply can result in significant penalties. It is important to understand the reporting requirements and file all necessary documentation on time.

In addition, you should consult a lawyer to ensure the entity form is respected — including prompt organizational filings with the Secretary of State and obtaining necessary business licenses.

These are just a few of the myriad of regulations your business must navigate. That’s why it’s critical to hire the right professionals to build your team, as missing any of these requirements may place your business in peril.

5. Operational Challenges

Operational planning is essential for a successful U.S. expansion. Key operational considerations include:

Employee benefits and regulations: U.S. regulations on health insurance, retirement plans, and other employee benefits can be significantly different from those in other countries. For example, in Europe, many employee benefits are government-run, while in the U.S., they are often the responsibility of the employer.

Logistics and supply chain management: Choosing the right location for operations includes considerations such as proximity to logistics centers and understanding regional operational costs.

Insurance and banking: Obtaining necessary insurance coverage and opening bank accounts can be challenging for foreign businesses. Some U.S. banks may not provide accounts to foreign-owned companies, and those that do might have stringent requirements. Certain banks may refuse to conduct business with certain entities in industries such as cannabis and cryptocurrency, to name a couple.

Establishing a U.S. Presence for Your Business

Setting up a business in the U.S. requires thorough planning and an understanding of various regulatory and operational challenges. From navigating the multi-layered tax system to selecting the right business entity and following U.S. regulations, each step is crucial for a successful expansion. By addressing these key considerations and seeking professional guidance, you can effectively establish your presence in the U.S. market.

For more detailed insights and personalized help, connect with our International Tax team and start your journey towards successful U.S. market entry today.

Setting up a business in the U.S., requires thorough planning and an understanding of various regulatory and operational challenges. This series will delve into various aspects of this process, providing guidance and practical tips. Our next article will discuss navi

OECD Publishes Additional Amount B Guidance

Key Takeaways:

The Amount B framework aims to simplify the arm’s length principle for pricing marketing and distribution activities, applicable to all taxpayers.
On June 17, 2024, supplementary guidance was released to finalize the administrative aspects of Amount B.
“Covered jurisdictions” are low-and middle-income countries, including some OECD and G20 members like Argentina and Mexico; “qualifying jurisdictions” are determined by income level and credit rating and have fewer than five local comparables.

Background

The Amount B framework for pricing baseline marketing and distribution activities is a new approach that seeks to streamline and simplify the application of the arm’s length principle. This approach applies to all taxpayers regardless of size and profitability. A report on Amount B was approved and published by the Inclusive Framework on February 19, 2024, and incorporated as an annex to Chapter IV of the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines.

The February 2024 report was published pending completion of work on some outstanding administrative aspects of the guidance. The supplementary guidance released on June 17 completes the work on those sections of the report. It consists of two documents, one of which defines and identifies “covered jurisdictions” within the scope of the political commitment regarding Amount B. These jurisdictions are those for which jurisdictions have agreed that an Amount B determination of returns in a covered distribution transaction will be respected regardless of whether the counterparty to the transaction has adopted Amount B.

A separate document addresses the definition and listing of jurisdictions determined to be “qualifying jurisdictions.” Qualifying jurisdictions are identified for two purposes: (1) a checking mechanism on the profit determined through the primary Amount B mechanism (Section 5.2 of the Amount B report), and (2) an adjustment to the profit determined through the primary Amount B mechanism for distributors in jurisdictions in which the global dataset of distributors does not provide sufficient coverage (Section 5.3 of the Amount B report).

Covered Jurisdictions

Under the agreement reached by the Inclusive Framework, jurisdictions can choose to apply the simplified and streamlined approach to the qualifying transactions of their in-scope tested parties; however, the outcome determined under that approach by a jurisdiction that has chosen to apply it would not be binding on the counterparty jurisdiction if that counterparty has not adopted the approach. To address this, members of the Inclusive Framework committed to respect the outcome determined under the simplified and streamlined approach when the approach is applied by what was initially called a “low-capacity jurisdiction.”

The Inclusive Framework originally said it would agree on the list of low-capacity jurisdictions by March 31, 2024; however, that deadline was not met. The first supplementary guidance document released on June 17 now addresses this. The term “low-capacity jurisdiction” has been replaced by “covered jurisdiction,” and includes certain low- and middle-income OECD and G-20 members.

The definition of covered jurisdictions is as follows:

Low- and middle-income Inclusive Framework jurisdictions as determined using the World Bank Group country classifications by income level, excluding EU, OECD, and G20 member countries.

Inclusive Framework jurisdictions that are OECD and G20 member states that otherwise meet the World Bank Group country determination as low- and middle-income, and that have expressed to the Inclusive Framework a willingness to apply Amount B. Argentina, Brazil, Costa Rica, Mexico, and South Africa fall in this category.

Any non-Inclusive Framework jurisdiction that meets the first criterion and expresses to the Inclusive Framework a willingness to apply Amount B will be added to the list of covered jurisdictions.

Qualifying Jurisdictions

The simplified and streamlined approach applies an operating expense cross-check as a guardrail for the primary return on sales net profit indicator. As part of this guardrail, a maximum or cap operating return-on-operating-expense (EBIT/Operating Expenses) ratio is specified, and if the actual ratio (as a result of the application of Amount B) exceeds that cap, the Amount B profit margin will be adjusted downward until the resulting return on operating expenses falls to the cap. This cross-check provides for both a default cap rate and an alternative higher cap rate, with the latter being applicable when the tested party is located in a “qualifying jurisdiction.”

The second supplementary guidance document released June 17 identifies the qualified jurisdictions for purposes of this operating expense cross-check cap and clarifies that Inclusive Framework members agreed that the term “qualifying jurisdiction” is not defined by reference to low-capacity. Rather, qualifying jurisdictions for purposes of the operating expense cross-check refers to jurisdictions that are classified by the World Bank Group as low income, lower-middle income, and upper-middle income based on the latest available World Bank Group country classifications.

This guidance document also provides a separate definition and enumeration of qualifying jurisdictions for an adjustment mechanism to the profit determined through the primary Amount B mechanism. Specifically, the return on sales specified in the pricing matrix will be adjusted for distributors in jurisdictions for which the global dataset of distributors does not provide sufficient coverage (the “data availability mechanism” described in Section 5.3 of the Amount B report).

In this context, the new guidance provides that a qualifying jurisdiction refers to jurisdictions with a publicly available long term sovereign credit rating of BBB+ (or equivalent) or lower from a recognized independent credit rating agency, and fewer than five local-country comparables in the global dataset.

The lists of covered jurisdictions and the two types of qualified jurisdictions will be updated every five years and published on the OECD website.

How MGO Can Help

In the evolving landscape of international taxation — where compliance and strategic adaptation are crucial to your success — MGO is uniquely positioned to guide your business through the complexities of the new Amount B framework. By understanding the intricate interplay between global tax regulations and your business operations, MGO can provide tailored guidance to align your transfer pricing strategies with the OECD’s latest guidelines.

Our international tax team excels at helping you identify the right pricing mechanisms and manage the necessary adjustments to optimize your business’s financial outcomes. For inquiries or support in navigating the Amount B framework, reach out to our team today.

Update: How the Latest Ruling on Farhy v. Commissioner Could Affect Your Penalty Assessments

Executive Summary

In April 2023, the U.S. Tax Court made news when it ruled in favor of businessman Alon Farhy, who challenged the Internal Revenue Service (IRS)’s authority to assess penalties for the failure to file IRS Form 5471.
IRS Form 5471 is the Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
In May 2024, the U.S. Court of Appeals for the D.C Circuit reversed the Tax Court’s initial ruling — underscoring the significance of context in assessing penalties for international information returns.

UPDATE (May 2024):

Recent developments in the Farhy v. Commissioner case have captured significant attention in the tax and legal sectors. On May 3, 2024, the U.S. Court of Appeals reversed the Tax Court’s initial decision, highlighting the importance of statutory context in penalty assessments for international information returns. This ruling emphasizes the need for a closer examination of statutory language, altering perspectives on penalty applicability for non-compliance.

The implications of this case extend to taxpayers and practitioners, as detailed in analyses by MGO (see below). The decision underscores the need for meticulous compliance practices and adept navigation of the complexities of U.S. international tax law, along with a deep understanding of judicial interpretations of tax regulations.

MGO’s professionals are well-positioned to assist clients in navigating the complexities arising from the recent Farhy v. Commissioner decision. With a comprehensive understanding of the changing landscape in penalty assessments for international information returns, we provide guidance to help companies adapt to new judicial interpretations and maintain compliance with evolving tax regulations.

ORIGINAL ARTICLE (published June 8, 2023):

On April 3, 2023, the U.S. Tax Court came to a decision in the case Farhy v. Commissioner, ruling that the Internal Revenue Service (IRS) does not have the statutory authority to assess penalties for the failure to file IRS Form 5471, or the Information Return of U.S. Persons With Respect to Certain Foreign Corporations, against taxpayers. It also ruled that the IRS cannot administratively collect such penalties via levy.

Now that the IRS doesn’t have the authority to assess certain foreign information return penalties according to the court, affected taxpayers may want to file protective refund claims, even if the case goes to appeals — especially given the short statute of limitations of two years for claiming refunds.

Our Tax Controversy team breaks down the Farhy case, as well as what it may mean for your international filings — and the future of the IRS’s penalty collections.

The IRS Case Against Farhy

Alon Farhy owned 100% of a Belize corporation from 2003 until 2010, as well as 100% of another Belize corporation from 2005 until 2010. He admitted he participated in an illegal scheme to reduce his income tax and gained immunity from prosecution. However, throughout the time of his ownership of these two companies, he was required to file IRS Forms 5471 for both — but he didn’t.

The IRS then mailed him a notice in February 2016, alerting him of his failure to file. He still didn’t file, and in November 2018, he assessed $10,000 per failure to file, per year — plus a continuation penalty of $50,000 for each year he failed to file. The IRS determined his failures to file were deliberate, and so the penalties were met with the appropriate approval within the IRS.

Farhy didn’t dispute he didn’t file. He also didn’t deny he failed to pay. Instead, he challenged the IRS’s legal authority to assess IRC section 6038 penalties.

The Tax Court’s Initial Ruling

The U.S. Tax Court then held that Congress authorized the assessment for a variety of penalties — namely, those found in subchapter B of chapter 68 of subtitle F — but not for those penalties under IRC sections 6038(b)(1) and (2), which apply to Form 5471. Because these penalties were not assessable, the court decided the IRS was prohibited from proceeding with collection, and the only way the IRS can pursue collection of the taxpayer’s penalties was by 28 U.S.C. Sec. 2461(a) — which allows recovery of any penalty by civil court action.

How This Decision Affects Your International Penalty Assessments

This case holds that the IRS may not assess penalties under IRC section 6038(b), or failure to file IRS Form 5471. The case’s ruling doesn’t mean you don’t have an obligation to file IRS Form 5471 — or any other required form.

Ultimately, this decision is expected to have a broad reach and will affect most IRS Form 5471 filers, namely category 1, 4, and 5 filers (but not category 2 and 3 filers, who are subject to penalties under IRC section 6679).

However, the case’s impact could permeate even deeper. For years, some practitioners have spoken out against the IRS’s systemic assessment of international information return (IIR) penalties after a return is filed late, making it impossible for taxpayers to avoid deficiency procedures. The court’s decision now reveals how a taxpayer can be protected by the judicial branch when something is deemed unfair. Farhy took a stand, challenged the system, and won — opening the door for potential challenges in the future.

It’s uncertain as to whether the IRS will appeal the court’s decision. But it seems as though the stakes are too high for the IRS not to appeal. While we don’t know what will happen, a former IRS official has stated he expects that, for cases currently pending review by IRS Appeals, Farhy will not be viewed as controlling law yet.

The impact of the ruling is clear and will most likely impact many taxpayers who are contesting — or who have already paid — IRC 6038 penalties. It may also affect other civil penalties where Congress has not prescribed the method of assessment in the future.

How You Should Respond to the Court’s Decision

You should move quickly to take advantage of the court’s decision, as there is a two-year statute of limitations from the time a tax is paid to make a protective claim for a refund. It’s likely this legislation wouldn’t affect refund claims since that would be governed by the law that existed when the penalties were assessed. Note that per IRC section 6665(a)(2), there is no distinction between payments of tax, addition to tax, penalties, or interest — so all items are treated as tax.

If you’ve previously paid the $10,000 penalty, it’s important to file your protective claim now, unless you’ve entered into an agreement with the IRS to extend the statute of limitations, which can occur during an examination. Requesting a refund won’t ever hurt, but some practitioners believe the IRS may try to keep any penalty money it collected, even if the assessment is invalid — because, in its eyes, the claim may not be. Just know, you can file your protective claim for a refund, but may not get it (at least not any time soon).

The Farhy decision could likewise be applied to other US IRS forms, such as 5472, 8865, 8938, 926, 8858, 8854. Some argue the Farhy decision may also be applied to IRS Form 3520.

How MGO Can Help

Only time will tell if the court’s decision will open the government up to additional criticisms for other penalty assessments. If you have paid your penalties and are wondering what your current options are, MGO’s experienced International Tax team can help you determine if you’re eligible to file a refund claim.

Navigating Turbulent Times for Global Supply Chain Management

Executive summary

Many international companies are struggling with their supply chain management amid external factors playing out on the global stage.
To mitigate the challenges, you should be aware of the current trends in supply management as well as strategies to improve your resilience and flexibility.
Current trends include AI and automation, supply chain as a service, circular supply chains, risk management and stability, and sustainability.
Diversifying your supply chain and creating a backup plan can help you remain agile.
Know the tax implications of your supply chain.

The last two years have seen major disruption in supply chain management — and throughout 2023, that turbulence is expected to continue. The freight supply and demand equation was a common issue during the pandemic and recovery period. We’re now seeing how the Russian-Ukraine conflict is reshaping the global supply chain for many companies. And amid all the economic uncertainty, supply shortages, and rising costs, the U.S. and EU (European Union) have been heavily investing in infrastructure, putting even more pressure on China with the U.S.-imposed tariffs’ strenuous implications.

While managing your supply chain is currently a challenge, you’re not completely at the mercy of these external factors which are generally outside of your control. There are strategies to mitigate the impact to your supply chain: your goals should be to both improve your supply chain resilience and flexibility to allow you to better manage the disruptions — those foreseen and unforeseen.

Our International Tax team breaks down some of the current trends and strategies to be aware of.

Trends in supply chain management

Some of the main trends in supply chain management include artificial intelligence and automation, supply chain as a service, circular supply chains, risk management and stability, and an increased focus on sustainability. Now, more than ever, mid-market multinational companies must be strategic. These additional constraints cause strain on these companies that are being forced to pivot to address these issues among additional disruption.

Odds are, you’ve been rethinking the way you currently manage your supply chain — because the global situations aren’t changing. The China tariffs are unlikely to disband soon, and there seems to be no end in sight to the Russia-Ukraine conflict.

Diversifying your supply chain

Many agree that the global supply chain was too dependent on China, and now companies are considering breaking away from the Asia Pacific region to look at the Mexican maquiladora or IMMEX programs. Both these programs are, for all intents and purposes, synonymous, save for one detail: the IMMEX added shelter companies as a modality. Under this shelter program, companies may set up operations in Mexico without establishing a legal Mexican entity.

These programs have been in existence since the 1960s, so they’ve proven their worth — however, they don’t work for everyone, so it’s worth perusing other options. It’s important to remember that sourcing from vendors in only one location, regardless of where that location is geographically, is accompanied by elevated risk.

To mitigate this, you should not only diversify your supply chain but also create redundancies to avoid a single point of failure. In addition, bringing your sources of supply closer to where you operate also reduces the opportunity for risk. Engage with new suppliers and manufacturers in the Americas, for instance, and analyze your current suppliers to see if there is any one region you rely on more heavily already, then minimize the distance between your production and purchasing — without, of course, sacrificing quality, cost, control, and reputation. By optimizing your global footprint, you can maximize your production opportunities, minimize risk, and scout new vendors and locations for future efficiency.

Devising a backup plan for supply chain disruptions to address multiple contingencies

At the end of the day, we know that no matter how sophisticated or agile your supply chain backup plan is, external factors — which are never static — can affect things in unexpected ways. With rapidly and ceaselessly changing global conditions, there’s no way to account for everything you could encounter.

But there are ways to prepare. Plan for multiple contingencies, weighing their outcomes. Don’t forget to think broadly and for new opportunities — for example, if you’re looking at expanding into new markets or territories or want to add a new product line, you must assess their plausibleness under a variety of conditions (and not just logistical conditions, like lead times and delivery … but also tax liabilities and compliance, too).

Keep your supply chain planning agile and ready to evolve by reviewing its current model and updating it to ensure it reflects the restraints and vulnerabilities you’re presently dealing with. By making a step-by-step plan — for multiple scenarios — you can chart your path forward, regardless of what unfolds on the global stage in these uncertain times.

How MGO can help

Knowing the tax implications of your supply chain is crucial to your global success, and our experienced International Tax team can help you navigate the supply chain turmoil — no matter how turbulent. By reviewing your current supply chain model to determine where your processes can be strengthened and made more efficient, as well as pinpointing your vulnerabilities, we can help you hone your supply chain’s true potential while safeguarding it against whatever comes next.

About the authors

John Apuzzo is the leader of our International Tax Practice. He supports public and private companies, and high-net-worth individuals, as they conduct business on the global stage. His passion for developing optimal tax strategies helps his clients reinvest in their businesses and enjoy the wealth they have worked so hard to earn.

Mandy Li is a transfer pricing partner and provides strategic and tactical transfer pricing solutions to public and private multinational organizations. She supports highly complex global engagements, with an emphasis on transactions moving to and from the China region.