Transfer Pricing: A Silent Audit Risk for Importing Brands

The IRS has a different opinion about what your overseas factory should charge you.

Transfer pricing has become an increasingly important compliance consideration for retail and CPG companies that source goods through related-party entities overseas. The IRS requires that transactions between related parties be conducted at arm’s length — meaning they must reflect pricing consistent with what independent parties would negotiate in a comparable transaction.

Transfer pricing risk can run in both directions. Some companies underprice imports from related-party suppliers to reduce the dutiable value of goods, while others overprice them to shift profits out of higher-tax jurisdictions. Both scenarios can attract IRS scrutiny, and penalties for substantial transfer pricing misstatements can reach 20% or more of the underpayment.

As a practical example, a U.S.-based brand importing finished goods from a related factory in Asia must be able to justify its intercompany pricing relative to comparable arm’s-length transactions. If the IRS determines that the pricing arrangement does not reflect market rates — either through a formal audit or under a penalty protection review — it can reallocate taxable income between entities and assess substantial penalties.

The most effective way to mitigate this risk is through contemporaneous documentation prepared at or near the time the transactions occur, benchmarking intercompany prices against available industry comparables, and maintaining consistent gross margin profiles across related entities. Waiting until an audit begins to build the transfer pricing file is a costly mistake that is entirely avoidable.

Bottom Line: Transfer pricing is no longer just a concern for large multinationals. Growing brands with global supply chains need to address it proactively — before the IRS does.