IC Accounting
Pick a function, enter the facts, and get the arm's-length charge, both entities' journal entries, FX, the year-end true-up, consolidation eliminations, and the country tax effect. Covers manufacturing, distribution, services, royalties, and financing, with Excel and Word exports.
Contract / toll manufacturer
TNMM, net cost plus
- Arm's-length transfer price
- CAD 1,080,000
- Manufacturer routine profit
- CAD 80,000
- Principal FX gain
- USD 28,571
The books
Each entity records its side of the deal in its own currency.
Canada
| Step | Account | Debit | Credit |
|---|---|---|---|
| Accumulate production cost | Inventory (WIP / finished goods) | 1,000,000 | |
| Cash / payables / payroll | 1,000,000 | ||
| Intercompany sale to principal | Intercompany receivable (principal) | 1,080,000 | |
| Intercompany revenue | 1,080,000 | ||
| Record cost of the sale | Cost of goods sold | 1,000,000 | |
| Inventory | 1,000,000 |
United States
| Step | Account | Debit | Credit |
|---|---|---|---|
| Purchase from manufacturer at 1.35 | Inventory | 800,000 | |
| Intercompany payable (CAD balance) | 800,000 | ||
| Remeasure CAD payable at 1.4 | Intercompany payable (principal) | 28,571 | |
| Foreign exchange gain (P&L) | 28,571 | ||
| Sell to external customer | Cash / accounts receivable | 1,000,000 | |
| Revenue | 1,000,000 | ||
| Relieve inventory for the sale | Cost of goods sold | 800,000 | |
| Inventory | 800,000 |
Principal result: revenue USD 1,000,000, cost USD 800,000, gross profit USD 200,000, plus an FX gain of USD 28,571.
Consolidation eliminations
Group reporting currency: USD
| Step | Account | Debit | Credit |
|---|---|---|---|
| A. Remove the intra-group sale | Intercompany revenue (manufacturer) | 785,455 | |
| Cumulative translation adjustment (OCI) | 14,545 | ||
| Cost of goods sold (principal purchase) | 800,000 | ||
| B. Remove the intra-group balance | Intercompany payable (principal) | 771,429 | |
| Intercompany receivable (manufacturer) | 771,429 |
Tax & regulatory analysis
| Entity / country | Taxable profit | Rate | Tax |
|---|---|---|---|
| Manufacturer · Canada | CAD 80,000 | 26.5% | CAD 21,200 |
| Principal · United States (incl. FX) | USD 228,571 | 21% | USD 48,000 |
| Group (USD), effective 22.12% | USD 286,753 | USD 63,418 |
Manufacturer tax shown in CAD; group total converts it at the period-end rate.
Keep contemporaneous transfer pricing documentation in both countries; it is the first defense against penalties.
Tax rates differ by 5.5 points; profit booked in Canada is taxed more, so the split must reflect functions and risks, not the rate gap.
If a tax authority imposes a primary adjustment, Canada treatment: Secondary adjustment under s.247; deemed dividend can trigger Part XIII withholding. United States treatment: Deemed dividend or capital contribution; accounts may be conformed under Rev. Proc. 99-32.
Pillar Two: groups with consolidated revenue of EUR 750 million or more in at least 2 of the last 4 years may owe a top-up tax where a jurisdiction's blended effective tax rate (all group entities in that country combined) is below 15%.
Canada: ITA s.247; contemporaneous documentation s.247(4)
United States: IRC §482; Treas. Reg. §1.482; §6662(e)/(h) penalties
Notes
Method. TNMM, net cost plus on fully loaded manufacturing cost.
FX risk. Invoice denominated in CAD (the manufacturer's currency), so the limited-risk party carries no FX and the principal remeasures the CAD payable.
Eliminations. Under ASC 830 the intra-group P&L is translated at the period average rate and monetary balances at the closing rate; the non-monetary purchase sits at its historical transaction spot. The residual translation difference is a cumulative translation adjustment (CTA) recognized in OCI, not P&L. Unrealized profit in ending inventory is held at the historical rate.
True-up. Book the true-up so it lands in the tested margin. After the true-up the tested party earns exactly its benchmarked return, so the eliminations hold.
Educational decision-support, not accounting, tax, or legal advice. Tax rates are standard statutory defaults to verify. Figures are simplified and positions should be reviewed with your advisors.