Transfer Pricing Audits

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The IRS has made it clear once again that transfer pricing remains a key focus in its ongoing enforcement efforts.[1]  And with significant additional resources to do so over the next decade, the IRS is likely to focus some of these resources on taxpayers who have not undergone a transfer pricing audit in recent years or, perhaps, ever.  For example, while the IRS is onboarding the many new transfer pricing experts it hired in 2023, it has sent compliance alerts to certain U.S. subsidiaries of foreign corporations that distribute goods in the U.S. where the IRS thinks that these subsidiaries are not paying their fair share of tax on the profit they earn on their U.S. activity.[2] Taxpayers would be wise to take this time to prepare for an audit by reviewing their material intercompany transactions and undertaking a transfer pricing risk assessment.Continue Reading Transfer Pricing Audits: What Taxpayers Can Do to Prepare

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

The IRS recently released informal guidance in the form of “Frequently Asked Questions” discussing its “observations of best practices and common mistakes in preparing transfer pricing documentation” under section 6662. Particularly right now, as many taxpayers find themselves in the throes of drafting and updating annual transfer pricing documentation reports, a review of these FAQs can provide critical insights into the IRS’s thinking that may improve the efficiency of future audits.
Continue Reading New IRS FAQs on Section 6662 Transfer Pricing Documentation Discuss Best Practices