The transfer pricing landscape is constantly evolving with rapidly changing IRS policies/procedures, greater efforts directed towards effective enforcement, and identifying noncompliance among taxpayers.
We have seen many indications of this. With the majority share of the Inflation Reduction Act’s $80 billion in IRS funding appropriated for tax enforcement, the IRS’s Large Business and International Division (LB&I) hopes it will lead to more transfer pricing work in the future. In light of these changes, recently, at the 12th Annual Pacific Rim Tax Conference in San Francisco, California, IRS officials discussed the following four key transfer pricing developments.
Four Key Transfer Pricing Developments
1. IRS Officials Look To Strengthen Transfer Pricing Enforcement Through Increased Staff and Technology
Jennifer Best, Acting Deputy Commissioner at the IRS LB&I division, informed that the IRS plans to increase its focus on transfer pricing by recruiting and training specialized staff and enhancing data analytics. According to Best, the IRS aims to improve its ability to identify transfer pricing noncompliance among taxpayers with improved information technology tools and external assistance. We have seen examples of this “external assistance” in the last few years with the increasing IRS willingness to hire transfer pricing advisors to build their cases for litigating large multinationals (as well as large multi-state operated U.S. national businesses). Best added that transfer pricing aligns with the IRS goals of strengthening enforcement on large corporations, as outlined in its strategic operating plan, released on April 5, 2023. This initiative is also part of the $80 billion in additional funding granted to the IRS by Congress last year through the Inflation Reduction Act. For more information, see our article on Inflation Reduction Act Funding to IRS Will Increase Examinations; Time to Focus On Transfer Pricing.[MG1][MC2]
2. IRS Plans to Accept ‘Unspecified Methods’ in Certain Cases That Lead to Reliable Results
The Acting Deputy Commissioner was further asked about the transfer pricing functions of the LB&I division and its openness to unspecified transfer pricing methods. Best stated that while a specified method remains the preferred choice in most cases, using an unspecified method is also acceptable in cases where it aligns with the regulations and leads to the most reliable result.
3. IRS Supports Amount B Under Pillar One of the Two-Pillar Plan of the OECD
Best also reaffirmed IRS support for the Amount B tax simplification rules under Pillar One of the Organization for Economic Cooperation and Development (OECD’s) two-pillar plan. She described the proposed Amount B rules as a “valuable capacity-building tool” for developing countries with limited expertise and experience in transfer pricing and limited access to relevant data for conducting thorough comparability searches.
David Bradbury, Deputy Director of the OECD’s Center for Tax Policy and Administration, discussed the Amount A profit reallocation rules while acknowledging that specific unresolved issues remain despite progress on the rules’ technical aspects. Bradbury said three milestones need to be achieved:
- Concluding negotiations with a finalized text, expected to occur by July 2023;
- Executing a multilateral convention, timing dependent on domestic consultation, legislative procedures, and administrative processes; and
- Ratifying Amount A.
4. IRS Officials Confirmed the APMA Will Still Accept Complicated Cases in Its APA Program
In an April memo, the IRS had outlined a more discerning approach to Advance Pricing Agreements (APAs), which would focus resources on cases with higher chances of success based on criteria such as transaction complexity and past experiences with other governments. According to that memo, Advance Pricing and Mutual Agreement Program (APMA) will now engage in a rigorous two-step review of APA requests — the first at the prefiling stage and the second after an APA submission is filed. At each step, APMA may decline a taxpayer’s APA request and recommend that the taxpayer apply to the International Compliance Assurance Program (ICAP) or indicate that the issues are better suited to be handled in an audit — joint or domestic. This two-step approach to accepting APA requests may add more confusion and decrease the number of requests by Taxpayers. Normally, the taxpayer seeking an APA would get a commitment from APMA at the prefiling stage before extensive work is initiated and substantial fees are paid to both advisors and the IRS for the APA filing.
However, according to Nicole Welch, acting Director of the IRS Treaty & Transfer Pricing Operations Practice Area, the IRS is committed to handling complex transactions through the APMA, and the guidance issued in the April memo does not imply that all complex transactions are suitable for joint audits.
If you want to ensure your company’s intercompany arrangements are tax-compliant, Withum’s dedicated transfer pricing professionals would be happy to assist you. Withum can create critical transfer pricing documentation to support the economic substance of the transactions and ensure the results are consistent with the arm’s length standard of worldwide tax regulations.
Authors: Marina Gentile, iMBA, Partner | [email protected] and Mukul Chhabra | [email protected]
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