Five Transfer-Pricing Issues for U.S. Entities Trading with Headquarters

September 16, 2026

Recent reports on Korean National Tax Service audits of domestic companies have identified issues involving Korean headquarters bearing costs for overseas affiliates and providing services to them. According to a September 14, 2026 report, the allegations included headquarters paying costs that should have been borne by domestic or foreign related parties and providing services to overseas affiliates without charge.

These examples also have implications for U.S. entities. An audit of Korean headquarters may require explanations and documents concerning transaction prices, cost allocations, and financial support involving the U.S. entity. The U.S. entity must likewise account for transactions with headquarters under U.S. tax law and maintain consistency between the two parties’ books and supporting records.

A U.S. entity is a taxpayer separate from its headquarters. Approval by headquarters or an internal group policy does not, by itself, establish that an expense is deductible or that transaction terms are appropriate in the United States. Here are five transfer-pricing issues U.S. entities should consider.

First, check whether purchase prices from headquarters reflect the U.S. entity’s functions.

If a U.S. entity purchases products from Korean headquarters for resale, the purchase price directly affects its profit. An excessively high supply price can reduce the U.S. entity’s earnings and taxable income.

U.S. transfer-pricing rules apply the arm’s-length principle to related-party transactions, just as they would to transactions between independent businesses. Beyond explaining that headquarters set the price, the entity needs support showing that the price is reasonable in light of its functions and risks.

If the U.S. entity bears inventory, local advertising, returns, and customer nonpayment risks, those responsibilities should be reflected in the pricing or profit-margin analysis. Losses can occur during the startup stage, but the entity should be able to distinguish losses caused by market-entry costs from those caused by related-party pricing.

Second, clearly distinguish loans from capital contributions when receiving operating funds from headquarters.

Recording funds received from headquarters as a loan does not by itself establish debt treatment for tax purposes. The actual intent and ability to repay, maturity, interest terms, and repayment history must also be considered.

If the funds are treated as a loan, the agreement should specify the amount, currency, interest rate, maturity, and repayment method, and the parties should actually administer the loan accordingly. An arm’s-length interest-rate analysis is needed even if headquarters decides not to charge interest. This does not mean that the U.S. entity can calculate and deduct an arbitrary interest expense merely because it has not paid interest. The substance of the transaction and applicable rules must be examined first. The U.S. entity should determine the character of the funds when they are received and ensure that the headquarters’ books are consistent. It is important not to leave a mismatch in which headquarters records an investment while the U.S. entity records a loan.

Third, substantiate the services actually received for management fees paid to headquarters.

When Korean headquarters charges management-support fees, IT fees, or marketing commissions, the U.S. entity should determine what services it received and how they benefited its business. A contract and invoice alone do not establish the deductibility of every expense.

If headquarters staff support the U.S. entity’s accounting or IT functions, retain descriptions of the work, hours spent, related costs, and allocation methods. Separately review shareholder activities performed by headquarters and duplicate charges for work already outsourced locally by the U.S. entity. Even an arrangement to pay headquarters a percentage of sales needs an explanation supporting the percentage and calculation method. Establish a process to verify the actual services and basis for the amount before making payment.

Fourth, the U.S. entity must obtain the documents needed for U.S. reporting.

Saying that the records are held at Korean headquarters does not mean that the U.S. entity is prepared to respond. Even if headquarters has a transfer-pricing report, verify that it reflects the U.S. entity’s actual transactions and financial figures and complies with U.S. requirements.

To defend against U.S. transfer-pricing penalties, the entity generally must have the required documentation in place when the tax return is filed and satisfy requirements such as providing it within 30 days of an IRS request. This does not mean every business must attach a transfer-pricing report to its return. However, beginning to assemble the records only after receiving an examination request makes it difficult to meet contemporaneous-documentation requirements.

The U.S. entity should retain related-party agreements, pricing support, service details, loan documents, and year-end adjustment records. Amounts billed or settled in a lump sum by headquarters at year-end should be reflected in the books and tax return only after identifying the purpose of the adjustment.

Fifth, check the Form 5472 filing requirement.

U.S. entities owned by Korean headquarters should pay particular attention to Form 5472. If one foreign shareholder directly or indirectly owns at least 25% of the voting power or value at any point during the tax year and there are reportable transactions with a related party, the filing obligation generally must be evaluated. A Korean corporation is also a foreign shareholder for this purpose.

Reportable transactions may include product purchases and sales, service fees, loans and borrowings, interest, rent, and royalties. For a wholly foreign-owned single-member LLC that is disregarded for U.S. tax purposes, contributions and distributions must also be considered. If there are reportable transactions, Form 5472 may need to be attached to a pro forma Form 1120.

Failure to file or substantial omissions can generally result in a $25,000 penalty, with additional penalties if the violation continues after an IRS notice. Do not omit the filing simply because the business has no sales or operates at a loss. Even in a year when the only transaction is receiving operating funds from headquarters, determine whether it is reportable.

The U.S. entity should also review tax adjustments made to Korean headquarters. An adjustment in Korea that increases headquarters’ product supply price and income does not automatically increase the U.S. entity’s cost of purchases. Without a corresponding U.S. adjustment, the same profit may be taxed twice. If necessary, consider the mutual agreement procedure under Article 27 of the U.S.–Korea tax treaty, and check eligibility requirements and deadlines early.

Before each year-end close, organize transactions with headquarters and confirm that each transaction is supported by an agreement, calculation, documentation, and the appropriate filing. Having headquarters’ finance team and the U.S. tax advisor review the same records can reduce errors. Such controls help lower the U.S. entity’s tax risk and provide a sound basis for understanding the local business’s actual profitability and financial position.

This column provides general tax information as of September 2026. Its application may vary depending on the ownership structure, transaction details, the entity’s tax classification, and applicable rules.

Related official resources

IRS — Transfer-pricing documentation guidance

IRS — Transfer-pricing examination and documentation guidance

IRS — Instructions for Form 5472

Text of the U.S.–Korea tax treaty

Related news coverage

Kyunghyang Shinmun — Report on National Tax Service audits (September 14, 2026)