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On April 25, 2023, the IRS published an interim guidance memorandum for agents and other employees of their Treaty and Transfer pricing operations practice.

 

In a landmark decision, the U.S. Tax Court ruled in favor of Medtronic, Inc. in a dispute over transfer pricing. The Court held that the Internal Revenue Service (IRS) had failed to prove that Medtronic had underpaid its taxes by using an arm’s-length price for its intercompany transactions.

 

Since its inception in 1971 and subsequent modifications, the IC-DISC has had its benefits surge and diminish following the variation of tax rates.

 

Recently, the IRS published their list of countries that require participation in doing international business with a boycotting country per Internal Revenue Code Section 999(a)(3).

The Sixth Circuit Court of Appeals in Eaton Corp. v. Commissioner has resolved a longstanding dispute over the cancellation of two advance pricing agreements (APAs) by the IRS.

Jason Rauhe, CPA, discusses the ins and outs of transfer pricing studies and the compliance involved.

The Sixth Circuit Court of Appeals in Eaton Corp. v. Commissioner has resolved a longstanding dispute over the cancellation of two advance pricing agreements (APAs) by the IRS.

On April 3, the IRS released Notice 2023-31, detailing that when proposed regulations under Section 903 are codified, the IRS and the U.S. Treasury Department intend to extend the transition period for the single-country exceptions documentation requirement.

On April 3, 2023, the U.S. Tax Court ruled in favor of Mr. Alon Farhy against the IRS.

The IRS is currently reviewing a critical issue related to the pricing of intercompany debt.

 

IRS Internal Guidance; a Focus on Advanced Pricing Agreements

On April 25, 2023, the IRS published an interim guidance memorandum for agents and other employees of their treaty and transfer pricing operations practice, specifically regarding requests for advanced pricing agreements, an effective tool typically used by larger multinational enterprises to help guarantee compliance for transfer pricing. The internal guidance increases the scrutiny in the initial review, which likely leads to more rejections quicker, and recommends prefiling memorandum when not required.

The Treaty and Transfer Pricing Operations practice area in the Large Business and International Division within the IRS has the responsibility of receiving Advanced Pricing Agreement (APA) submission requests, reviewing them, and approving them. APAs are tools used to gain compliance certainty with the IRS to ensure arm’s length principals are satisfied for transactions ahead of them occurring and ahead of any tax filing as a protective measure.

While APAs are broad in scope, potentially being applicable to all transactions between any related entities, they’re most used by businesses with an international organizational structure. Of 77 successfully executed APAs in 2022, over half were between foreign parents and US subsidiaries.

Currently, approval of APAs is resource intensive and slow. The current application use fee is $113,500, and the average time per accepted APA is over three years. The purpose of the internal guidance, therefore, is an attempt to maximize the efficient use of IRS resources and increase the timeliness of successful APAs.

The interim guidance outlines the system that evaluates if a received APA request is the most efficient transfer pricing mechanism given the circumstances. If not, the request will be rejected and referred to alternative methods. As such, we expect to see timelier and more rejections of APA requests. The guidance will have no change on the requirement of a prefiling memorandum but encourages where it’s not required to gain the benefit of a prefiling memorandum review. The prefiling memorandum may help ensure that the APA won’t be rejected due to the determination that another transfer pricing workstream is better suited given the business circumstances. Per a senior IRS official, transfer pricing “fits squarely within the goals” for funding from the Inflation Reduction Act.

As transfer pricing becomes an elevated topic of conversation with tax authorities, it is becoming increasingly important to have studies and documentation to protect against fees and additional scrutiny. If you have any questions regarding transfer pricing or any international tax-related manner, don’t hesitate to contact us.

Charlie Petelka, is a Tax Consultant in the firm’s Global Business Services practice and is responsible for assisting clients and adding depth in all areas of the firm’s international tax consulting services, including preparing client calculations, international forms, IC-DISC tax returns, and transfer pricing documentation.

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