In November, the IRS Office of Chief Counsel issued a generic legal advice memorandum (“GLAM”) AM-2022-006, titled “Realistic Alternatives and Tax Considerations in the Application of Sections 482 and 367(d).” As the title suggests, the GLAM analyzes the realistic alternatives principle, which was codified in section 482 by the Tax Cuts and Jobs Act (Pub. L. No. 115-97).

The realistic alternatives principle, of course, is not new and has been part of the section 482 regulations since 1993. See Treas. Reg. § 1.482-1(d)(3)(iv); 58 Fed. Reg. 5253, 5266, 5275 (Jan. 21, 1993). But the realistic alternatives regulatory provisions were short on practical substantive guidance. Thus, the GLAM provides new insight into how the IRS currently thinks the realistic alternatives principle ought to be applied. In sum, the GLAM applies concepts from the corporate finance discounted cash flow (“DCF”) valuation method to make its realistic alternative comparisons.

Continue Reading GLAM’s Realistic Alternatives Analysis Adopts Corporate Valuation DCF Concepts

On September 13, Treasury proposed new regulations relating to taxpayers’ rights to access the IRS Independent Office of Appeals (“Appeals”). Appeals was designed to resolve disputes with the IRS in a fair and impartial manner. Taxpayers secured the right to take certain disputes to Appeals following the Taxpayer First Act of 2019. However, the proposed regulations seek to limit when taxpayers can go to Appeals, and the types of issues that can be raised.

The proposed regulations identify 24 types of issues that will not trigger Appeals rights. The most notable issues include regulatory validity challenges, challenges to IRS notices or revenue procedures, and certain tax treaty questions. In addition to issuing proposed regulations, the IRS has also already updated the Internal Revenue Manual to reflect the limitation on Appeals’ jurisdiction to determine issues based solely on validity challenges to regulations or IRS notices or revenue procedures.

Continue Reading Not So Independent?: New Proposed Rules Constrain IRS’s Independent Office of Appeals

In 2018, the IRS reminded exam teams to perform a “diligent penalty analysis” in every transfer pricing case. Since then, we have observed that the agency is increasingly willing to impose penalties, even where reasonable minds differ as to the appropriate transfer pricing. Penalties are often raised late (at the very end of an audit or even after the dispute is in court) and can create an extra liability of hundreds of millions—or billions—of dollars. For all these reasons, it is worth your time to brush up on how these penalties work, as well as what you can do to defend against them.

Continue Reading Turning the Screw: Penalties in Transfer Pricing Disputes

In April, the IRS released a practice unit on country-by-country (or “CbC”) reporting. The purpose of the document is twofold: (i) describe the background of CbC reporting and (ii) provide guidance to IRS personnel on the use of CbC reports “in the IRS high-level transfer pricing risk assessment process.” Although the practice unit repeatedly stresses that the IRS will not audit CbC reports, there is potentially less to this claim than meets the eye.

Continue Reading Less than Meets the Eye: The IRS Practice Unit on CbC Reports

In ancient Rome, a college of “augurs” would predict the future by observing the flight patterns of birds, examining the entrails of animal sacrifices, or interpreting natural phenomena. While perhaps less colorful, our method of divination will hopefully be a little more precise. To develop this blog post, we have consulted our own augurs and have summarized all our predictions for transfer pricing developments in the coming year.

Continue Reading Looking Forward: Predictions for 2022

On September 9, 2021, the Treasury Department and the Internal Revenue Service (“IRS”) issued its Priority Guidance Plan for 2021-2022. The Priority Guidance Plan gives the public a sense of what regulations and other guidance the Treasury Department and the IRS might develop over the following 12 months. Among dozens of other pending and potential guidance projects, the Priority Guidance Plan lists the following two new potential section 482 regulations projects:

  • Regulations under §482 clarifying the effects of group membership (e.g., passive association) in determining arm’s length pricing, including specifically with respect to financial transactions.
  • Regulations under §482 further clarifying certain aspects of the arm’s length standard, including (1) coordination of the best method rule with guidance on specified methods for different categories of transactions, (2) discretion to determine the allocation of risk based on the facts and circumstances of transactions and arrangements, and (3) periodic adjustments.


Continue Reading Priority Guidance Plan Portends New Transfer Pricing Guidance

A recent Tax Notes article analyzes the “standard of review” that the Tax Court will apply to the IRS’s transfer pricing adjustments. In transfer pricing cases, the Tax Court determines whether the IRS has abused its discretion by proposing an adjustment that is “arbitrary, capricious, or unreasonable.” Although courts often describe this standard as a

Many taxpayers are familiar with information document requests where taxpayers are notified that taxing authorities are inquiring into certain transactions based on their receipt of the request. But today, many types of foreign tax information exchanges occur without the taxpayer’s knowledge. Moreover, tax administrations around the world are expanding tax information exchange programs. For example, on May 19, 2021, the European Union (“EU”) approved a measure to spend an additional € 270 million to improve national information exchange programs with a particular emphasis on upgrading information technology systems and financing joint audits.

Taxpayers should: 1) refresh themselves on the major types of tax information exchanges, 2) know how that information is used, and 3) be prepared that anything they provide to one tax administration could likely end up in the hands of another.
Continue Reading No Secrets are Safe in an Era of Global Tax Information Exchange

In the dawn years of transfer pricing, when the bulk of international trade focused on tangible goods, relatively little attention was devoted to the analysis of transactions involving services.  The 1968 U.S. Treasury Regulations governing intercompany services focused on the allocation and apportionment of costs with respect to services undertaken for the benefit of the related parties, roughly in line with the current Services Cost Method, and provided a high level discussion of the services that were an integral part of the business activity of a member of a controlled group without elaborating on the methods to be used to test compliance with the arm’s length standard (Section 1.482-2(b) (1968)).  In the 1995 Transfer Pricing Guidelines from the Organization for Economic Cooperation and Development (“OECD”), the analysis of pricing of intracompany services occupied a mere 15 pages.  In the mid-2000s, there was a renewed focus on the pricing of intercompany services.  First to the stage were the U.S. Treasury Regulations in Section 1.482-9 promulgated in August of 2009, followed by several International Practice Units in 2014 through 2017, and then by the OECD with a revised Chapter VII in the 2017 OECD Guidelines.  The increased attention is not surprising:  over the last 20 years, from 1999 to 2019, the growth of trade in services far outpaced that of tangible goods (215% vs 137% for exports and 199% vs 143% for imports), with particularly robust performance in maintenance and repair, financial, and business services.
Continue Reading Intercompany Services: The Next Frontier of Transfer Pricing Disputes

Assume the Internal Revenue Service (“IRS”) is auditing your company’s transfer pricing. The administrative process is starting to break down, and it looks as if the IRS might assert a sizeable income adjustment. What is your duty to save documents for a potential upcoming court case?

Continue Reading Document Preservation for Transfer Pricing Litigation: What You Need to Know