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The U.S transfer pricing regulations are designed to ensure that companies are paying fair prices when transferring goods or services between related parties, as well as preventing tax avoidance through manipulation of these transactions. The arm’s length standard is the benchmark used by the Internal Revenue Service (IRS) to determine what constitutes a fair transaction – this means that any transfer pricing should reflect what an unrelated party would pay for similar items under similar circumstances.
Advance Pricing Agreements (APAs) allow firms to submit proposals outlining their transfer pricing strategies in advance and receive an agreement from the IRS on how these transactions will be handled in terms of taxes and other requirements. Methods such as Comparable Uncontrolled Price (CUP), Resale Price Method (RPM), Cost Plus Method, and Profit Split Method can be used to determine comparable prices across different countries or markets.
Overall these rules provide companies with a framework for ensuring compliance with U.S transfer pricing regulations while also avoiding potential issues with the IRS in the future.