The past month has been highlighted by the IRS release of a number of International Practice Units (IPUs) on transfer pricing issues. IPUs are the internal guidance and training material developed to assist examination personnel and transfer knowledge and consistent audit application from the IRS collection of experts in their International Practice Network.
In the never ending battle between taxpayers and the IRS in determining the proper arm’s length price, this information is of great help to practitioners. Each IPU describes specific transfer pricing issues that arise in examinations and best practices for conducting a proper audit. In many instances, great detail is provided that is intended to align with the IRS 2014 Transfer Pricing Audit Roadmap. These guides instruct examiners to follow an iterative process to arrive at the proper transfer pricing results including: obtaining an overview of the taxpayer’s business; reviewing organizational charts; proper transfer pricing documentation; selection of the “best method” or alternative methods; identifying the controlled transaction; analyzing comparables and the economic analysis used. This information can guide practitioners to where the IRS will focus during exam and help practitioners get ahead of documentation and transactional questions. Doing so can greatly reduce the time and contentions during a transfer pricing audit, especially in a field where the IRS is all too eager to litigate. More importantly, alliantgroup is using IPUs in our work to better support a taxpayer’s transfer pricing position.
Elsewhere in the International Tax arena, the Tax Court chimed in on the application of the arm’s length standard in Guidant LLC v. Comm’r, 146 T.C. 5 (2016). In a ruling for partial summary judgment, the Tax Court weighed in on two issues: 1) whether the IRS is required to determine the “true separate taxable income” of consolidated group members when the adjustment was made to the group’s parent; and 2) whether the IRS can aggregate various types of transactions under IRC § 482 instead of making adjustments to each class of transaction.
The court concluded that: 1) the IRS is not required to “always determine the true separate taxable income of each controlled taxpayer” when making a transfer pricing adjustment; and 2) the IRS has the authority under IRC § 482 to aggregate transactions of various types. This is the first step in the case as neither the amount of the adjustment with respect to each controlled member nor the transactions to which the adjustments relate have been determined.
This ruling in favor of the IRS is yet another signal of government latitude in making transfer pricing adjustments. If it was not already apparent, this is another example of why taxpayers should be closely reviewing intercompany transactions for proper transfer pricing policies and documentation. We will keep you updated as the case moves forward.
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