In a recent case, Villa-Arce v. Commissioner, a whistleblower sent information to the IRS that he believed showed that the company was using improper transfer pricing practices and taking unjustified deductions. The IRS opened an examination that resulted in other adjustments, but none based on the information from the whistleblower. For that key reason, the D.C. Circuit affirmed the Tax Court decision that the whistleblower was not entitled to an award for the collection of proceeds from the unrelated adjustments. Yet while the whistleblower walked away empty-handed, the case illustrates a unique type of transfer pricing and audit risk that comes from whistleblowers that companies should recognize. And given the indefinite nature of transfer pricing and the potential amount of dollars at stake, we will likely see more whistleblower actions involving transfer pricing.Continue Reading Blowing the Whistle on Transfer Pricing
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”) or a joint audit. Continue Reading APMA’s New Interim APA Guidance
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
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 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 August 13, 2021, the IRS released a Chief Counsel Advice (“CCA”) (CCA 202132009) addressing the tax treatment of intercompany reimbursements of the Branded Prescription Drug (“BPD”) fee, a non-deductible excise tax imposed by the Patient Protection and Affordable Care Act on entities that manufacture or import branded prescription drugs for sale to specified government programs. The CCA concludes that intercompany reimbursements of the BPD fee are not per se excludable from gross income, but rather, the inclusion or exclusion of the reimbursement depends on whether the entity paying the fee was the beneficiary of the payment under the facts and circumstances. For pharmaceutical companies subject to the BPD fee, the CCA stops short of providing certainty that reimbursements of the fee are per se excludable, but nevertheless, offers useful guidance on how the reimbursements might be structured to support exclusion in many cases. Outside of the pharmaceutical industry, companies in other industries that pay and receive intercompany reimbursements of other material non-deductible costs may also find the CCA’s guidance to be instructive by analogy.
Continue Reading IRS CCA Addresses Intercompany Reimbursements of Branded Prescription Drug Fee: Guidance May be Relevant to Taxpayers Across Industries with Material Non-Deductible Expenses
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.
After Altera’s victory in Tax Court in 2015, many companies with cost sharing arrangements (“CSA”) ceased sharing stock-based compensation (“SBC”) costs. To address the possibility of a reversal on appeal, many of these companies added reverse claw-back provisions to their CSAs. Under these provisions, in the year a reversal of Altera becomes final, the US participant typically “claws back” from the foreign participants the amount of SBC costs not shared in prior years (the “claw-back true-up”). The effect is a large inclusion of SBC costs into the US participant’s income in the year the reversal becomes final.
These reverse claw-back provisions were revisited by companies in 2019, when the Ninth Circuit reversed the Tax Court, and in 2020, when the U.S. Supreme Court declined to hear Altera’s appeal. Companies were concerned about whether the IRS would respect the provisions or insist that adjustments be made year-by-year. Should taxpayers report the claw-back amount in 2020, or amend prior year returns to include the SBC costs in the cost pool for each open year, or modify the CSA to defer or cancel the payment pending IRS guidance? On July 13, 2021, the IRS provided guidance on these questions, in the form of a Chief Counsel Memorandum, AM-2021-004 (the “CCM”).Continue Reading IRS Memo on 482 Adjustments for CSAs with Reverse Claw-Back Provisions
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