2022 – The Year of Waiting for US Transfer Pricing
August 18, 2022
By: Carl Budenski
At a glance
- The main takeaway: There are several major and potentially game-changing transfer pricing developments in the pipeline that multinational businesses should be aware of.
- Impact on your business: Some of the biggest updates on the horizon include four high-priority projects helmed by the Treasury and IRS, stalled litigation cases and tax law changes, among other big-ticket items.
- Next steps: Aprio’s International Tax Team can help keep your company abreast of transfer pricing developments as they occur so that you can prepare proactively and position your organization for success.
The full story:
Since 2017, transfer pricing practitioners have been spoiled with juicy headlines to discuss with clients. The largest of those headlines was the passage of the Tax Cuts and Jobs Act (TCJA) in the final days of 2017, which gave way to an avalanche of international activity in 2018. We then saw transfer pricing cases close in favor of the IRS in both 2019 with Altera Corp. and 2020 with the Coca-Cola Company. In March 2020, COVID-19 hit, and through the rest of that year into 2021, transfer pricing practitioners scrambled to address stimulus payments and comparable company adjustments caused by the economic fallout.
Then came 2022: “The Year of Waiting” (at least for transfer pricing practitioners). 2022 was supposed to be the year with big transfer pricing developments on the horizon; however, to date, these developments have yet to materialize, as it seems they are being kicked further and further down the road.
Treasury and IRS prioritized 4 big transfer pricing projects
First, late in 2021, the US Department of the Treasury and the IRS released their “2021–22 priority guidance plan,” which outlined high-priority regulatory projects they are devoting resources to in the first half of 2022. Four transfer pricing-specific projects made the list, although the details were vague. The projects included:
1. “Regulations under §§ 367 and 482, including regulations addressing the changes to §§ 367(d) and 482.” Likely, this means the departments will coordinate the two code sections and finalize regulations that better refine the definition of intangible property, as well as treatment related to aggregation and valuation.
2. “Regulations under § 482 clarifying the effects of group membership (e.g., passive association) in determining arm’s length pricing, including specifically with respect to financial transactions.” This likely means that the departments will clarify the definition of “implicit support” with respect to financial transactions that have historically had very little guidance contained in § 482. This project was likely prompted in response to recent updates to the OECD Guidelines with respect to financial transactions.
3. “Regulations under § 482 further clarifying certain aspects of the arm’s length standard, including (1) coordination of the best method rule with guidance on 16 specified methods for different categories of transactions, (2) discretion to determine the allocation of risk based on the facts and circumstances of transactions and arrangements, and (3) periodic adjustments.” This is the broadest and vaguest project mentioned, with multiple components. Although there are multiple interpretations, many experts think there is appetite to align both transaction-specific methods with the OECD Guidelines’ more broad application, as well as better define risk allocation to align with the OECD Guidelines. Finally, the third point may look to revise current periodic adjustment rules to capture the expanded definition of intangible property.
4. “Guidance updating Rev. Proc. 2015-41, providing the procedures for requesting and obtaining advance pricing agreements and guidance on the administration of executed advance pricing agreements.” The departments are likely implementing measures to streamline the Advance Pricing Agreement (APA) process.
At the time of writing this update, we have not seen activity, nor further guidance from the IRS or Treasury with respect to these four projects. Thus, the waiting continues.
What’s happening in the world of transfer pricing litigation?
2022 transfer pricing litigation has also been silent. Although Medtronic, Inc. v. Commissioner was retried before the Tax Court in June of 2021, following the Eighth Circuit’s 2018 remand, the Tax Court has yet to issue a new opinion.
After being delayed 16 months due to COVID-19, Facebook, Inc. v. Commissioner resumed virtual testimony in early May, and the trial is set to resume August 22. Facebook is fighting a $1.76 million tax bill it received for its 2010 tax year, where the IRS argues the company undervalued intangible assets that it transferred to an Irish subsidiary. Facebook could be responsible for $9 billion in additional taxes, interest and penalties.
Other notable transfer pricing cases pending include 3M Co. v. Commissioner; Coca-Cola; and others.
Updates on the tax landscape
President Biden’s and Democrats’ agenda for tax reform, including revisions to many 2017 TCJA international tax provisions, has repeatedly stalled, although the recent revival of a pared-down energy-climate-tax bill now appears likely to pass. The new bill includes a corporate minimum tax of 15%, but it doesn’t pose other modifications to existing international tax provisions.
Similarly stalled, the OECD’s two-pillar global tax framework has not gained traction globally, as Poland and Hungary have precluded unanimous agreement at various points. While the OECD initially planned for mid-2023 adoption, it now appears that adoption is more likely to take place in 2024 or later. The US has not helped grease the wheels, either. While former Federal Reserve Chair and current Treasury Secretary Janet Yellen has shown outspoken support of pillars one and two, Congress, led by Republicans, has been successful in shutting down any path forward so far.
There is one player in the US tax world that is becoming increasingly more involved with respect to transfer pricing — and that is the states. Domestic, or state-specific, transfer pricing is not a novel concept. However, many states returned to transfer pricing as a forgotten, overlooked source of revenue in 2020, as their budgets were obliterated by the impacts of COVID-19. Through the initial use of contracted consultants, states’ departments of revenue, as well as the Multistate Tax Commission, have developed more expertise on transfer pricing matters with more targeted, successful audits.
In an unprecedented development, Indiana, followed quickly by North Carolina, implemented formalized negotiation programs via the Indiana Advanced Pricing Agreement and North Carolina Voluntary Corporate Transfer Pricing Resolution Initiative. These types of programs intended to settle both retrospective and sometimes prospective transfer pricing disputes through formalized negotiation, similar to a federal APA program. These programs experienced considerable success, with North Carolina collecting close to $100 million in disputed corporate income taxes between August 1, 2020 and December 1, 2020. Subsequently, other states have joined the party and are offering similar programs, such as Louisiana and New Jersey, among others.
The bottom line
All in all, it appears that transfer pricing practitioners will have to continue waiting for juicy headlines to talk to clients about.
With the lack of small-medium enterprise thresholds, US companies with international operations and intercompany transactions are required to prepare US transfer pricing documentation according to the IRS’s “10 principal documents” format. As international tax rules grow more complex each year, more companies entering the US market are surprised by the system’s divergence from the OECD Guidelines’ documentation and methodologies format. While it is possible to leverage OECD-based global documentation, adapting to comply with US regulations is critical to avoid a prolonged IRS audit process. Developing sound transfer pricing policies and associated intercompany agreements has never been more important.
Aprio’s International Tax Team can help companies minimize risk and tax dollars paid by providing transfer pricing benchmarking, studies and policy development, helping ensure that intercompany transactions are structured correctly.
If you are interested in partnering with Aprio to navigate transfer pricing, contact us today.
- About Aprio International Tax Services
- How to Develop the Right Transfer Pricing Strategy for Your Business
- Transfer Pricing and COVID-19 – Time to Re-Examine Your Policy
Senior Manager, Transfer Pricing
About the Author
Carl is a Transfer Pricing Senior Manager with Aprio’s International Tax team. He advises multinational and domestic businesses on intercompany transactions of tangible goods, intangible property, services, and loans. Passionate about helping businesses grow, Carl has helped many clients, including a recent client save $1 million in US tax annually through the use of transfer pricing.