Tax Beat: What Middle-market CFOs Need To Know About International Tax in 2026

(00:01) [music] Welcome to the Cherry Bekaert Tax Beat, [music] a conversation about tax that matters. [music] Welcome to this edition of the Cherry Bekaert Tax Beat podcast. Today we are talking about the opportunities, distractions, and issues companies are living through with cross border activity. Companies of all sizes are doing business in other countries.

(00:28) Whether buying goods and services from offshore companies or selling goods and services to customers in other countries, all businesses have faced considerable challenges and fast moving changes this year. Uh joining us today to talk about cross border activity is Nelson Yates, the leader of our firm's international tax and transfer pricing services.

(00:49) So good afternoon Nelson. How you doing today? >> Good afternoon. Thanks so much for being here. I'm excited. I think it's an incredible topic for our client base specifically here at Cherry Bekaert um when it comes to cross border transactions obviously with the backdrop of tariffs but more realistically just over the last 20 years how everything anymore has some sort of international bent to it so looking forward to a great conversation >> and as always joining me my partner in crime Sarah McGregor McGregor how's life

(01:20) treating you >> hey Brooks everything's going great uh the we're we're into 2026 and so tax season is getting started and uh it's great to think about new first quarter opportunities and all the things that happen in 2025. We're going to have to put it into tax return soon. >> Yeah. Well, yes.

(01:41) And happy new year to everybody. I guess I should say that. And happy tax season to Sarah. She's almost giddy. She's giddy with excitement. That's all. >> That that makes one of us. So Nelson has recently joined our firm but comes with experience serving large multinational companies um with tariffs interest rates I would say supply chain issues change in economies significant directing direction direction shifts from our government and that's being polite about it I would say in other countries governments companies need to stay agile

(02:13) and focus on what is important so u Nelson let's talk about US companies that have existing production facilities or distribution centers in other countries or are thinking about moving that direction. So, how about a basic primer on what what is transfer pricing about and what should a CFO or business owner um be caring about here? >> Yeah, great. Thanks, Brooks.

(02:40) So simplest explanation that I've come up with to date is when there are related parties, an affiliate, a subsidiary, what have you, a brother and sister both own a company, right? And they are transacting business and that business is going across an international border. The price, whether it's for a product, whether it's for a service, needs to be a price that is reflective as if those two people were unrelated, as if they had an adversarial relationship.

(03:06) Like when you go buy a car, right? Unless you're buying your car from your dad who owns the dealership, you are in an adversarial relationship trying to get the best price just like the dealership's trying to get the best price. That applies to cross border trade between related parties. The price of the service or the good has to be priced at a quote unquote arms length.

(03:29) And I guess I guess just from my perspective sometimes I would say many times people would say why do I care or who cares and the answer is we got two different governments two different countries that both want to say there's the highest amount of profit in their country on this transaction. So I mean part of this is getting to an answer and hopefully you know you know fair market values in the eye of the beholder but hopefully you know you tried to get structure and u build a case that gets to the most tax advantageous from an

(04:03) overall perspective for the client but anyway excuse me I interrupted you. No, no, all good. You're absolutely right. Who cares, right? Who are the stakeholders in this transaction? Well, obviously there's the two companies, right? They should have some sort of vested interest in ensuring that they are each being remunerated for the value drivers, the risks they're bearing in the given transaction.

(04:27) But from an external perspective 100% the revenue authorities of each of the two countries involved or if it's a multi-party transaction multiple countries right involved they want to make sure that their tax base is as big as their tax base can be based on the facts of the transaction at hand. So it's incumbent on the taxpayer to one very clearly identify where are their value drivers like what is the thing that is causing value for this service for this product where does that reside is it in the US is it outside the US right and document

(05:01) that uh and make sure that they understand that that pricing that's going on on that service on that product between these two related parties over the international border is being priced to reflect that a great example is like if I'm selling a widget in the US to my German low-risk distributor, my German distributor, I don't sell it to them at cost, right? Because one, from a tax perspective, that would be bad cuz Germany's higher tax than the US.

(05:30) Uh but two, there's no third party that would say like, "Hey, look, um yeah, I'll sell you something at cost. I don't care if I make a single dime on it." So, one, factually, it's just not accurate as to what happens between unrelated parties. uh but also it gives you a terrible tax answer in a lot of uh in a lot of intercomp transactions.

(05:48) I mean especially when you look at what we're doing in the US from having a 21% statutory rate from having the fiday regime that's available to taxpayers where they get a preferential rate of now under going in 26 I think it's 33.34% deduction which gives them effectively a 15% in some change effective rate on certain streams of income related to crossber trade so realistically having value in the US which is the truth for most of our companies in the middle market um if they're US headquartered one that's factually accurate but two

(06:24) they probably are getting a better tax answer out of it too. >> So Nelson uh you you shared with us the example about selling a widget from a US manufacturer to its German distributor but and that is is a very common and something that's easily understandable the price of of a good but that's not the only kind of intercomp cost were talking about here. No, no, not at all.

(06:47) I mean, I think the interesting thing about all multinational businesses, right, but especially in the middle market, um, I get a tax doesn't wag the dog, right? Our clients, they are founders, they are managing members. A lot of them, they are pursuing revenue where revenue opportunities exist. Makes total sense with that actually kind of puts the business case together in and of itself.

(07:16) A lot of the time the strategy, the decisions around how are they going to market, how are they pursuing clients, how are they pursuing that revenue opportunity are all actually being made out of the US. Even if they do have that German company or that UK company or that Singapore company, there's a huge amount of value that's still sitting in the US.

(07:37) I think we are a lot of us right and I I'm guilty of it myself are stuck in the idea as to what's IP or in intangible property or intellectual property and we think things like oh you know computer code we think of like the Googles of the world or the apples of the world and I can't tell you how many times I've had conversations with middle market companies or even just even large manufacturers sometimes they go well we just make stuff like we don't like okay tell me this would you invite your biggest competitor in and let them walk

(08:06) your manufacturing floor and you detail out your processes, your knowhow, the strategy behind what you're making, why you're making it, and how you pursue revenue. And they would look at you like you're crazy. They'd be like, "No, there's no way I would ever do that, right?" Well, that's that's IP. That is value driving intangible property.

(08:27) And it's sitting where these decision makers are, which for a lot of our client base is smack dab in the US. So they should be rewarded or remunerated for that value. >> So we have the knowhow. It's also financing uh and services and uh those kinds of things as as well uh that are subject to >> making sure that they're that the pricing for these items is appropriate between between competing countries.

(08:57) So the US is not the only comp country that cares about transfer pricing. other local countries all have their >> uh views and rules and regulations on this. >> They absolutely do. Um you know, local countries still abide by what's called the arms link standard. Maybe they follow slightly different rule set, but it's still trying to get at the same thing, which is what is the appropriate price as if those parties weren't related that they would price that good, that service for.

(09:25) Um you touched on some important things just real quick. um like management services, right? So maybe it's not all IP driven like this this important strategy, but the US or the parent company does a lot of stuff for its subsidiaries. It should be remunerated or paid for for some of that stuff. So, you know, they should be reimbursed their costs.

(09:45) Sometimes they should be reimbursed their costs plus so you know some sort of markup. All of transfer pricing under the umbrella of trying to get to what that price is really looks at a couple things. One, is it a routine sort of service, right? Like sort of lower margin, but hey, heck, we should be reimbured for our cost.

(10:03) We should get a little bit of markup on it. Or is it really this non-rine, this effort that comes from entrepreneurial activities? Should they be remunerated or paid for that kind of and that sort of sets the barbell between sort of low margin to like a percentage of profit sort of remuneration. So is that German distributor just uh distributing and managing sales to known customers or are they tasked with creating new markets, identifying new products and uh being part of the overall value >> operation? Exactly Sarah and you touched on something good which is like

(10:41) marketing intangibles, right? Building and investing in a marketplace to build your brand, to build your name in a local jurisdiction generate something intrinsic of value that is an intangible asset that that local country has generated and they should be rewarded from. Not the same amount of money as they say the person that actually came up with the design of the widget and all the cool knowhow and technology that goes into it, but hey, they're spending money to invest.

(11:09) they're not being reimbursed for that rein that investment into their marketing. They should get some percentage of the pie. Now, that's assuming if they're successful. So, in the the flip side, they're not successful, they misspent that money, they're probably going to have to bear some level of the loss. >> All right.

(11:26) So, I think we've kind of set the stage in the big picture about, you know, the economic uh issues and where the value is and what we're looking at. So, let's take it down to the more tactical. Um, and specifically, what do you tell a uh CFO or a director of tax that they need to do if this is an issue in their company? >> Mhm. >> Yeah. >> So, again, going back to the middle market, one of the nice things are the folks that we talk to when we're talking about transfer pricing or commercial transactions are typically business folks. They may be the CFO. They may be

(12:03) the controller. They might be somebody in FPNA. But unlike very large corporations that have, you know, huge tax departments, the middle market typically has operational folks that are handling some components of the tax vertical uh from when it comes to the business. So they have a knowledge of the business.

(12:22) Where does this value driver sit? Where does the person that makes these key decisions sit? So, the one of the best practices anybody can do is kind of just sketch out what that is, right? Hey, look, we're thinking about opening up a a plant or a distributor in Canada. Okay, take a moment. Tell me about your business.

(12:40) You know better than I do. Even for your own internal processes, document out where does that value sit. Oh, well, you know, the founder's here in the US and he sits in Chicago and he's the one that comes up with all this stuff. Okay, document it, right? What do you think Canada's going to do? Oh, well, we're just going to sell them goods and they're going to sell it to the market.

(12:59) Okay, where do those customers come from? Oh, well, they're our customers. Like, we've developed them. They're just the Canadian affiliates of our current US customers. Okay, document it. Right. So, tax advisors such as Cherry Bekaert, we are here to help you. And there is no replacement for a robust sort of transfer pricing report.

(13:17) But even on the smallest end of international expansion, there are things that a company can do that starts putting in place a transfer pricing policy, helping them understand what is relevant, where should the profit sit. Um, again, tax never wags the dog, so to speak, but having those kinds of proactive thoughts about international expansion will certainly make your accounting team much happier when you're telling them to book entries, but also will make the conversations with adviserss such as ourselves and heaven forbid

(13:50) conversations with the IRS um, easier because you can say, "Hey, look, this is what we did. This is why we've done it." So the transfer pricing should really be part of your operations and not just an exercise for tax purposes. Uh >> 100% 100%. It is it's something that should be interwoven with your commercial operations to the point where it ultimately becomes second nature.

(14:14) Hey, are we setting up a distributor or am I buying a UK company that has their own product that they that I think is going to be a huge addition to our offerings? Right? two very different things how we think about who should be getting profits that come from the future growth of the company. >> Having said that, we still need a transfer pricing document of some sort.

(14:36) So, can you at least just give your uh two or three minute explanation of you know what that is and what that process looks like? >> Sure. Yeah. So, there's something called section 6662 documentation, or at least that's what tax advisors call it. And the goal there is to provide penalty protection when your transfer pricing, that price that you're setting on these related parties goods and services um differs from what the IRS thinks and they make an adjustment or propose an adjustment and it's pretty substantial

(15:06) from what your uh revenue allocation was, right? And so having a report to be able to turn it over and say, "Wait a minute, I just didn't make this up out of thin air. here. Here is the economic analysis behind it. That's what that serves. Um, you know, what goes into it? Well, there's sort of an industry write up.

(15:26) There are the factual writeups specific to the company itself and that's done through functional interviews talking to the key stakeholders on the client side or on the taxpayer side understanding the business how we identify those value drivers and then our transfer pricing team uses a a set of comparables or benchmarking um provided by third party you know kind of database uh companies that say okay hey look if you're doing X this is sort of the range that X should be priced at.

(15:55) And then of course they have to make adjustments. They have to say, "No, that's not an accurate comparable. Kick that out. This one is accurate, but we got to tweak it here and there." And then they come up with one, what's the best method to price the transaction? And then what is the actual inner cortile range? Meaning, what's the range of pricing for that best method that the client can then say, "Oh, yeah, it should be X in that range.

(16:19) " And that's how I'm going to price those transactions. And those similar like it, right? That's the start of a transfer pricing policy. >> Well, when you're talking about transfer pricing, we we can't get away from talking about tariffs. And uh I think Nelson, you and I have talked before about, you know, that tariffs are not an an add-on on top of the transfer pricing.

(16:40) That if if we're really going to be thinking about tariffs, you've got to think of them in two different two different functions. And what are you what are you paying tariffs on and what are you not paying tariffs on? Correct. Yeah. So tariffs, right, they're in the backdrop. Probably hard to find uh international trade where that's not impacted by tariffs.

(17:03) Um the questions really are twofold. One, which is is it a related party transaction like we talked about. If so, that provides an opportunity to think about how to mitigate what the tariffs are imposed on, i.e. what part of that transaction is actually dutable. Um, you know, a lot of the times pre-tariff, right, or lower tariff world, we didn't really pay too much attention to what went into the pricing.

(17:28) That widget, that widget was 100x because that's what that widget was. Well, maybe that widget really isn't worth 100x. Maybe the widget itself is something less than 100, but there's other fees that were added into that that if you broke them out wouldn't be subject to the tariff under the tariff rules. So being able to do that as a transfer pricing exercise along with coordination and we have some law firms we work with that do global trade advisory global trade consulting right because you got to come at it from both angles. Then the second leg is the

(17:58) refund or the potential refund opportunity that exists. Um I think that's going to be a very cumbersome process regardless of whether it's a related party transaction or a non-related party transaction. But where the questions I think becomes even or the waters become even muddier is on related party transactions because people are going to have to identify who bore the cost for the tariffs I think right for the refund was it the person that imported was it the outbound manufacturer right um you know in a third party transaction you could say oh

(18:30) well I pushed that back on the manufacturer offshore they ate that or I pushed it on to the customers and they paid for it when you take away uh at least one leg of that and you say, "Well, it's all one business. We're related." Yeah, we may have third party customers, but if we didn't pass it on to the customers, somebody paid for it.

(18:48) So, who paid for it within the company, so to speak. Was it our German operations or our UK operations or the US? And how do we think about that? And when a refund happens, how do we allocate that back out? So, I do think there's an avenue for transfer pricing when it comes to any sorts of potential refunds in the future, maybe on the front en

(19:09) d, i.e. quantifying what those refunds should be to seek them and then two, how do we actually allocate them if we're successful in getting a refund? But a lot more of that to come, I'm sure, not only with the Supreme Court findings, but if it gets kicked to the appellet to kind of tell what the refund process is, it's it's it's going to be a lot.

(19:27) [snorts] Well, I there just there's so much uncertainty with the baseline of the tariffs themselves and then >> again we're just taking it to another level of complexity when we're talking about you know the pricing for the tariff and then it has a ramification back again on your actual transfer pricing calculations.

(19:49) I mean it's kind of never ending. >> Yeah, I agree 100%. I think the last thing um and I and I probably should have touched on a little bit earlier that I would just hang what transfer pricing means to our middle market friends, right? Is you Brooks, you asked me, you know, why is this important, right? We talked about trying to get at the right price, which is truly there because of tax authorities and you want the revenue where you want it to be >> from a a tax nerd's perspective.

(20:16) Why is it important? Well, because ultimately it's going to influence that company's overall global tax liability, right? If you have more profit in a high tax jurisdiction versus a low tax jurisdiction also, well, what is that intercompany flow? Should it be a royalty or should it be a service? Right? That's going to influence at least from a US perspective whether that has uh what type of source that's considered.

(20:43) Is it foreign source income or not? What type of character is that? Can I use foreign tax credits to mitigate the US cost on that? Flip it on the other side, you go, is that a vatable charge at the local country? Do I get a good deduction for it at the local country? So transfer pricing, while as Sarah said, it's tied to the commercial one one for one, when you drill down, you go, well, what's it mean from a true tax compliance and tax planning opportunity perspectives? It is ubiquitous ac it's it's universal across it, right? it influences almost

(21:16) every aspect of any compliance form uh as well as what your global tax kind of policy or footprint looks like. So, it's it's just everywhere and that's what one of the reasons I think it's so exciting um in the middle market as well as as well as the larger corporations. >> That's it.

(21:36) Someone else who's equally excited about tax compliance. I love it. Welcome. Welcome, Nelson. Welcome. >> I I was also going to just make a brief seg. I mean uh when you go to your financial statements this is typically in the realm of a permanent of a permanent difference too when you start talking about uh tax rates and global rates and all that stuff.

(21:56) So you have >> absolutely >> it can have a u meaningful uh meaningful impact on your b your true uh gap u bottom line when uh when you're looking >> same with valuation allowances too right Brooks I mean if you if if you're if it's not characterized as something that's going to allow you foreign source income that you of the right type that you can use credits against you put a valuation allowance up next thing you know you have another hit to your rate so yeah for those people that are reporting rate and managing at a rate

(22:21) perspective it's it's it's fundamental Yeah. >> All righty. All righty. Let's uh move on to uh some final comments. So, Nelson, anything else you would like to uh uh share? >> No, I think we touched on a lot of things and I think a lot of people's heads might be swimming uh especially in the middle market space when we're talking about, you know, transfer pricing and and what's it mean to them.

(22:47) Um look, there's it's got its own language. I totally get it. Uh I I think if we always go back to the basics of we're just trying to put the right price on that good or that service between two related parties. It's the role of the advisers such as Cherry Bekaert to say okay how let's let's explain that to you in a little bit more detail and then also provide a practical approach because one size does not fit all.

(23:11) Um right you want the you want your most robust as an adviser. We always want to say 6662 documentation. That is what you need. But you're going to have some clients be like I I made, you know, $100,000 overseas. >> Right? Like I I'm just now trying to grow overseas. So what's the practical approach for me? Um and then the last comment I would have which is international growth does come at a cost.

(23:37) I I used this analogy the other day and it's like I I I [clears throat] grew up in a household of cars, right? My dad was a big car guy. So, you're you're racing a car. You go buy an old beater and you race around the track on amateurs and guess what? You're doing really well. Fantastic. Great. And you go, "Well, you know what? I think I can improve.

(23:52) I want to go to the next level." Well, just to have table stakes at the next level. Now, you're buying a fancier car, fancier tires, a car and a truck that you're going to or a truck and a trailer to tow it in, right? And then you're going to go lose maybe because now you're at a different playing field. I get it. It stinks, right? But there's that there is a level of table stakes when you say I'm going to expand to that revenue opportunity overseas, but I want to be compliant with it.

(24:17) You're going to have an increase in compliance costs naturally flowing from that. And that's sort of the table stakes of it. And I think it's important that as trusted adviserss, we make sure our clients know that on on the front end. Tax doesn't wag the dog. I say that a million times. But at the same time, if you're going to pursue global revenue, you have to understand that there's a cost that comes with that.

(24:37) both from an international but also from from a or I'm sorry both from a US but also from a non US potential compliance and tax cost too. So there are costs with going global so to speak. >> All right Sarah >> uh yeah I think one of the things that Nelson mentioned resonates with me and that is that it you have to understand the operations of the company.

(25:01) This is not a taxon or a financial statement or a financial accounting only activity. That's a an important part of it. But you also have to understand what is going on with the business. And I think that's where our middle market clients can excel because there's fewer in leadership perhaps and they understand more and work together more closely uh and have a better sense of the operations than uh in some cases where a larger company might have siloed tax over in a in a sideline um and they're trying to gather this information from a

(25:35) from a transfer pricing perspective. >> Great. From my perspective, I still, at least last time I looked, uh, transfer pricing is still the largest dollar in IRS settlements on an annual basis for the most part. So, this is not, uh, you know, I tried to tell clients when I talk about this, this is not some little remote hidden issue that nobody pays attention to.

(26:02) I mean, the IRS has litigated and won vast amounts of money on this. Sometimes they've lost vast amounts, but I mean it's any case it's it is not a issue they ignore and and at some point you cross from that $100,000 profit that Nelson was talking about earlier until until you start making more and then you start get on the radar.

(26:24) And I just say that the sooner you get the pro, you know, your processes and documentation set up, the easier it is and the more tax efficient you're going to be as you continue to grow. 100%. Brooks, the last little plug I'll say is we're rolling out some service offerings for our what you'd call lower middle market companies or even larger companies that are making their first foray overseas to help sort of put best practices in place that are maybe not that full 6662 robust documentation report but at least starts putting on a path towards ultimately getting to the

(26:59) place where when revenue and risk you know in the client's mind justify it that they already taken a lot of preliminary steps to sort of have that best practices of of how to be thinking about transfer pricing. So moving to a full documentation report isn't that far off. >> Right.

(27:18) Right. That's a big jump if you go from zero to all the way to the >> Yep. All right. That's a wrap on today's discussion of transfer pricing and cross border activities. Uh thank you for listening in. Uh quick disclaimer that we are not providing tax advice on this podcast. Please consult with your tax advisor, hopefully at Cherry Bekaert, with your specific tax issues or to discuss information from today's podcast.

(27:44) Check out the firm's website at cbh.com for the latest guidance and materials on this and other tax and business topics. Uh this concludes today's podcast. Please like, share, and subscribe. Thank you, Nelson. Thank you our listeners for spending your time with us. We truly appreciate it. Let's call it a day and go forth in peace. >> [music]