Mayer Brown announced today that Sonal Majmudar, former international tax counsel with the Internal Revenue Service (IRS), joined its Tax practice as a partner. Sonal will be resident in the firm’s Washington DC office. Her arrival bolsters Mayer Brown’s market-leading, global tax offerings, particularly with regard to transfer pricing controversies and high-stakes international disputes.
On April 25, 2023, the IRS’s Advance Pricing and Mutual Agreement (“APMA”) Program issued new interim guidance for its review of taxpayer Advance Pricing Agreement (“APA”) requests. Notably, the guidance introduces an “optional pre-submission review” for taxpayers that wish to submit a prefiling memorandum before submitting a formal APA request. Based on the pre-submission review, APMA will give a preliminary opinion whether it believes that an APA is well-suited to achieve tax certainty for the proposed covered transactions. The new interim guidance also instructs APMA personnel on how to review formal taxpayer APA requests for acceptance to the program, or whether to suggest an “alternative workstream” such as the International Compliance Assurance Program (“ICAP”)[1] or a joint audit.
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
As market participants evaluate their loan portfolios and implement strategies to transition away from the London Interbank Offered Rate (“LIBOR”), they must address not only third-party loans, but related-party loans as well.
Continue Reading LIBOR Phase Out – Tax Implications in the Context of Related-Party Loans
On April 15, 2020, OECD released the report titled “Tax and Fiscal Policy in Response to the Coronavirus Crisis: Strengthening Confidence and Resilience” (the “COVID-19 Response”). The COVID-19 Response discussed the decisive action many governments have taken to contain and mitigate the spread of the virus and to limit the adverse impacts on their citizens
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
In the U.S., transfer pricing benchmarking under the Comparable Profits Method (“CPM”) or Transactional Net Margin Method (“TNMM”) depends on the availability of public company financial data. In recent years, the decreasing number of U.S. listed and non-exchange traded companies has made this benchmarking more challenging, not only due to the smaller population from which the comparable can be selected: Many of the remaining listed and non-exchange traded companies are either large companies that own intangibles or small companies that often operate at a loss. This trend should prompt transfer pricing practitioners to consider new, creative approaches in selecting comparable companies for purposes of CPM/TNMM, and in appropriate cases, to re-consider transactional or other methods that do not rely on publicly available profitability data. Further, an APA might now be a prudent choice to obtain certainty, even if APAs had not been considered necessary or worthwhile from a cost-benefit perspective in the past to mitigate tax risk.
Continue Reading The Vanishing U.S. Comparable
Benchmarking—the process of screening, selecting, and analyzing comparable companies—is time consuming. Analysts can spend innumerable hours every year preparing transfer pricing documentation, with a substantial portion of that time dedicated to benchmarking. Even with improvements in the quality of databases (which offer a vast array of quantitative and qualitative data), the sets of potential comparables that analysts must sift through are often enormous.
With the applications of artificial intelligence (or “AI”) expanding by the day, it is time to start thinking about whether AI could automate parts of the benchmarking process.
Continue Reading Artificial Intelligence for Benchmarking: The Wave of the Future
In the context of a Cost Sharing Arrangement (“CSA”), Treas. Reg. §1.482-7(c)(1) defines a platform contribution (“PCT”) to be “any resource, capability, or right that a controlled participant has developed, maintained, or acquired externally to the intangible development activity (whether prior to or during the course of the CSA) that is reasonably anticipated to contribute to developing cost shared intangibles.” Treas. Reg. §1.482-7(g)(2)(viii) defines subsequent PCTs as those whose date occurs subsequent to the inception of the CSA. Treas. Reg. §1.482-7(g)(1) explains that “a value for the compensation obligation of each PCT Payor” has to be “consistent with the product of the combined pre-tax value to all controlled participants of the platform contribution that is the subject of the PCT and the PCT Payor’s RAB share.” Treas. Reg. §1.482-7(e)(1)(i) notes further that “RAB shares must be updated to account for changes in economic conditions, the business operations and practices of the participants, and the ongoing development of intangibles under the CSA.”
While requiring that the RAB shares be updated, the regulations provide little guidance as to how this is to be accomplished. In particular, the regulations do not specify whether the Payors’ obligations with regard to the prior PCT and the subsequent PCT should be calculated on a combined basis, or whether separate RAB shares, and separate PCT obligations, are appropriate. Whether a combined or separate RAB share will be more appropriate after any subsequent PCT will therefore depend on facts and circumstances of the specific PCTs contributed to the CSA over the life of the CSA.
Continue Reading Calculating RAB Shares Following Additional Platform Contributions