The Inflation Reduction Act and Transfer Pricing: Key Facts You Should Know

September 8, 2022

At a glance

  • The main takeaway: A portion of the IRS’s funding from the Inflation Reduction Act will be directed toward enforcement actions on corporations and high-net-worth individuals.
  • Impact on your business: This increase in enforcement funding will most likely trigger more audits of transfer pricing arrangements, which means multinational businesses need to prepare proactively.
  • Next steps: Aprio’s Transfer Pricing Team can help you assess and mitigate transfer pricing risk as a result of this legislation.

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The full story:

With the recent enactment of the Inflation Reduction Act (IRA), signed by President Biden on August 16, the IRS will receive $80 billion in additional funding. More than $45 billion of this amount will be allocated to additional enforcement actions on corporations and high-net-worth individuals — which will most likely lead to more audits of transfer pricing arrangements.

Here are key facts multinational businesses should know and what you can expect.

How the IRA affects transfer pricing

While multinational corporations are expected to have US transfer pricing documentation in place for all cross-border intercompany transactions, the IRS historically has placed a large emphasis on targeting intangible property transactions. Recent examples of IRS court cases that ensnared notable companies and their intangible transactions include Coca-Cola, Medtronic, 3M and Meta.

However, companies with tangible goods or service transactions are not free from increased scrutiny. The nearly $46 billion earmarked for enforcement is partially intended to lead to a massive hiring spree. President Biden has estimated that an additional 87,000 individuals will be added to the IRS headcount; this will include lawyers, economists and transfer pricing specialists. Although it will take time to deploy these resources, IRS Commissioner Chuck Rettig said he will ensure “these provisions are put in place.” Practitioners will stay tuned for future developments on Commissioner Rettig’s 10-year plan.

The bottom line

Now is the time to make sure you have your transfer pricing house in order. You should prepare contemporaneous documentation each year and cover all of the intercompany transactions occurring cross-border. Having outdated intercompany agreements is also critical to supporting intercompany transactions during an IRS transfer pricing examination, so it’s crucial for you to update these agreements to match updated transfer pricing documentation and your economic reality.

Aprio’s Transfer Pricing Team is able to help you start the process of assessing and mitigating transfer pricing risk. Contact one of our team members today.

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About the Author

Carl Budenski

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.