A compensating adjustment is a tax-related modification made by a taxpayer who believes that the transfer price reported for a controlled transaction reflects an arm's length price. This adjustment occurs when the reported price differs from the actual amount charged between associated enterprises. It is important to note that this adjustment must be made before the taxpayer files their tax return.
Compensating adjustments are primarily used in the field of tax law, particularly in transfer pricing cases. Transfer pricing refers to the pricing of goods, services, and intangibles between associated enterprises. This term is relevant in various legal contexts, including corporate tax compliance and international taxation. Users can manage some aspects of this process by utilizing legal templates and forms provided by platforms like US Legal Forms, which are designed to assist with tax-related filings.
Here are a couple of examples of abatement:
(hypothetical example) Consider two companies, Company A and Company B, that are part of the same corporate group. Company A sells goods to Company B at a price that is lower than the market rate. If the tax authorities adjust the price for Company A, Company B, as the disadvantaged party, can then file for a compensating adjustment on their tax return, reflecting the arm's length price they believe is appropriate.
This is not a complete list. State laws vary and users should consult local rules for specific guidance.
| State | Notes |
|---|---|
| California | Has specific regulations regarding transfer pricing adjustments. |
| New York | Follows federal guidelines but may have additional state requirements. |
| Term | Definition |
|---|---|
| Transfer Pricing Adjustment | An adjustment made by an advantaged person to align pricing with market standards. |
| Arm's Length Principle | The guideline that transactions between associated enterprises should be priced as if they were between unrelated parties. |
If you believe a compensating adjustment applies to your situation, first confirm that the advantaged person has filed their tax return. Then, gather the necessary documentation to support your claim. You may consider using legal templates from US Legal Forms to assist with your filing. If the situation is complex, consulting a tax professional or attorney may be beneficial.
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It is a tax adjustment made by a disadvantaged taxpayer to reflect an arm's length price for a controlled transaction.