Transfer Pricing Documentation

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 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

The Inland Revenue Authority of Singapore (“IRAS”) has issued transfer pricing guidelines for companies affected by the COVID-19 pandemic, which includes guidance on documentation requirements, term-testing for related party transactions and Advance Pricing Arrangements (“APA”).
Continue Reading Singapore’s Transfer Pricing Guidelines for COVID-Affected Businesses

In February 2020, the Organization for Economic Cooperation and Development (“OECD”) released Transfer Pricing Guidance on Financial Transactions (“Guidance”). The Guidance is significant because it is the first time that the OECD’s Transfer Pricing Guidelines have been updated to include guidance on the transfer pricing aspects of financial transactions. In general, a financial guarantee provides for the guarantor to meet specified financial obligations in the event of a failure to do so by the guaranteed party. There are various terms in use for different types of credit support from one member of an MNE group to another. At one end of the spectrum is the formal written guarantee and at the other is the implied support attributable solely to membership in the MNE group. Here we use guarantee to mean a legally binding commitment on the part of the guarantor to assume a specified obligation of the guaranteed debtor if the debtor defaults on that obligation. The situation likely to be encountered most frequently in a transfer pricing context is that in which an associated enterprise (guarantor) provides a guarantee on a loan taken out by another associated enterprise from an unrelated lender. From the borrower perspective, a financial guarantee may affect the terms of the borrowing. For instance, the existence of the guarantee may allow the guaranteed party to obtain a more favorable interest rate since the lender has access to a wider pool of assets, or to increase the amount of the borrowing. From the perspective of the lender, the consequence of an explicit guarantee is that the lender’s risk would be expected to be reduced by having access to the assets of the guarantor in the event of the borrower’s default. Effectively, this may mean that the guarantee allows the borrower to borrow on the terms that would be applicable if it had the credit rating of the guarantor rather than the terms it could obtain based on its own, non-guaranteed rating. A number of methods can potentially be used to value guarantees. The yield approach calculates the spread between the interest rate that would have been payable by the borrower without the guarantee and the interest rate payable with the guarantee. The interest spread can be used in quantifying the benefit gained by the borrower as a result of the guarantee. The cost method aims to quantify the additional risk borne by the guarantor by estimating the value of the expected loss that the guarantor incurs by providing the guarantee. Popular pricing models for this approach work on the premise that financial guarantees are equivalent to another instrument and pricing the alternative, for example treating the guarantee as a put option and using an option pricing model to price the put option. The valuation of expected loss method would estimate the value of a guarantee on the basis of calculating the probability of default and making adjustments to account for the expected recovery rate in the event of default.
Continue Reading OECD on Financial Guarantees

COVID-19 has placed unforeseen stress on the distribution structures of Multinational Enterprises (“MNE”) due to catastrophic losses and costs from supply chain interruptions and plummeting demand. Existing intercompany agreements most likely do not cover the allocation of catastrophic costs or losses and several questions may need to be addressed. For example, should catastrophic costs be shared among group members, and if the answer is yes, then how?
Continue Reading Allocation of Catastrophic Costs

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