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TRANSFER PRICING RESOURCES FOR THE UNITED STATES

SECTION 482 USER GUIDE
SECTION 6662 USER GUIDE
COST SHARING REGULATIONS
INDIVIDUAL STATE RESOURCES
NEW AND PROPOSED REGULATIONS
OTHER NEW DEVELOPMENTS
IRS PRACTICE UNITS
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NEW AND PROPOSED REGULATIONS

US Regulations Under Section 385

The IRS issued final and temporary regulations under section 385 of the Internal Revenue Code that establish threshold documentation requirements that ordinarily must be satisfied in order for certain related-party interests in a corporation to be treated as indebtedness for federal tax purposes, and treat as stock certain related-party interests that otherwise would be treated as indebtedness for federal tax purposes. The final and temporary regulations generally affect corporations, including those that are partners of certain partnerships, when those corporations or partnerships issue purported indebtedness to related corporations or partnerships.
Effective October 21, 2016

Country by Country Reporting

On June 30, 2016 the IRS issued the final Country-by-Country Reporting regulations, following up on the proposed regulations which were issued on December 22, 2015 and incorporating comments received on the proposed regulations. The final regulations maintained the proposed reporting threshold such that the regulations apply to entities residing in the United States that are the ultimate parent of multinational enterprise groups with annual revenue of USD $850,000,000 or more for the preceding annual accounting period.

In December 2016, the IRS issued the draft Form 8975 and its accompanying draft Schedule A for reporting the country-by-country information, and in February 2017, the IRS issued draft instructions for completing the Form 8975 and Schedule A.
June 2016, December 2016, and February 2017

Revenue Proc. 2015 - 40

This Revenue Procedure, effective as of October 30, 2015, provides guidance on the process of requesting and obtaining assistance under U.S. tax treaties from the U.S. competent authority, acting through the Advance Pricing and Mutual Agreement Program and the Treaty Assistance and Interpretation Team of the Deputy Commissioner (International), Large Business & International Division of the Internal Revenue Service.

Revenue Proc. 2015 - 41

On August 12, 2015 Revenue Procedure 2015-41 was published, which provides guidance on the process of requesting and obtaining advance pricing agreements from the Advance Pricing and Mutual Agreement program, as well as guidance on the administration of executed APAs.

Services

This document contains final regulations that provide guidance regarding the treatment of controlled services transactions under section 482 and the allocation of income from intangible property, in particular with respect to contributions by a controlled party to the value of intangible property owned by another controlled party. This document also contains final regulations that modify the regulations under section 861 concerning stewardship expenses to be consistent with the changes made to the regulations under section 482. These final regulations potentially affect controlled taxpayers within the meaning of section 482. They provide updated guidance necessary to reflect economic and legal developments since the issuance of the current guidance.

IRS Revenue Procedure 2007-13 identifies specified covered services that are support services and generally do not involve a significant arm's length mark-up. The identified services must meet the other conditions set forth in the Services regulations in order to be evaluated under the SCM.

Final Cost Sharing Regulations - Effective December 16, 2011

In August 2005, proposed regulations relating to cost sharing arrangements were issued. The Treasury Department and the IRS collected extensive comments on a variety of issues addressed in the August 2005 regulations. In response to these comments, temporary regulations (released on January 5, 2009) made several significant changes to the rules provided in the August 2005 proposed regulations. On December 16, 2011 the IRS released the final cost sharing regulations. The final regulations implement practically all of the requirements contained in the temporary regulations. These regulations provide guidance regarding methods under section 482 to determine taxable income in connection with a cost sharing arrangement. These regulations affect controlled taxpayers within the meaning of section 482 that enter into cost sharing arrangements.
In addition, effective December 19, 2011 the IRS issued new temporary and proposed regulations that add or would add additional provisions to the final regulations.

Guidance Regarding Foreign Base Company Sales Income

This document contains final and temporary regulations that provide guidance relating to foreign base company sales income in cases in which personal property sold by a controlled foreign corporation is manufactured, produced, or constructed pursuant to a contract manufacturing arrangement or by one or more branches of the controlled foreign corporation. These regulations modify the foreign base company sales income regulations to address current business structures and practices, particularly the growing importance of contract manufacturing and other manufacturing arrangements.



OTHER NEW DEVELOPMENTS

IRS Memorandum on Exchange of Tax Information

This memorandum from the IRS Associate Chief Counsel (International) addresses the issue of when legal responsibilities to protect tax return information arise in the context of electronic data transmission through the Common Transmission System (CTS). The CTS is being developed under the OECD Forum on Tax Administration in order to facilitate the automatic exchange of financial account information, country-by-country reporting, and other exchanges of information between tax administrations. The IRS determined that information that will be transmitted by the IRS to foreign tax administrations (outbound transmissions) through the CTS is return information under section 6103 in the hands of the IRS, so throughout the exchange process should be protected as required by section 6103. Furthermore, that information becomes treaty-protected information in the hands of the foreign country when the information is exchanged pursuant to a tax convention or other international agreement on taxes. In the case of information provided to the IRS by foreign tax administrations (inbound transmissions) through the CTS, the moment when legal protection arises is less certain.
June 17, 2016 (released October 14, 2016)

Barriers exist to properly evaluating transfer pricing issues

The Treasury Inspector General for Tax Administration ("TIGTA") issued a report entitled "Barriers Exist to Properly Evaluating Transfer Pricing Issues." TIGTA found that: (i) the IRS provided external stakeholders adequate education and outreach related to the transfer pricing examination process; (ii) some IRS employees may not be consistently following the Transfer Pricing Audit Roadmap; (iii) the IRS does not have a process to ensure that all transfer pricing issues are identified for specialized review because 20 percent of the transfer pricing inventory is received from the Specialist Referral System; (iv) Transfer Pricing Practice ("TPP") employees do not have access to the Specialist Referral System and are reliant on International Business Compliance ("IBC") function management to share any transfer pricing referrals with them; (v) the Rules of Engagement between the TPP and the IBC function are not always being followed for working transfer pricing-related examinations; and (vi) there are no separate performance measures related to quantifiable results to determine the success of the IRS’s transfer pricing efforts, including Appeals determination information that could be used to better refine the approach for identifying and working cases.
September 28, 2016

U.S. Treasury White Paper on the European Commission's State Aid Investigations

The U.S. Department of the Treasury has issued a White Paper on the state aid investigations being undertaken by the European Commission. Treasury states that these investigations, if continued, have considerable implications for the U.S. government and for U.S. companies—in the form of potential lost tax revenue and increased barriers to cross-border investment. The White Paper discusses Treasury's concerns with respect to these investigations, which include a concern that the European Commission is not adhering to the OECD's Transfer Pricing Guidelines but rather is employing a different arm’s length principle that is derived from EU treaty law.
August 24, 2016

IRS Releases Competent Authority Statistics

On April 27, 2016 the Internal Revenue Service released its competent authority statistics for 2015, comprising data from the Office of the United States Competent Authority, which includes both the Advance Pricing and Mutual Agreement Program and the Treaty Assistance and Interpretation Team. The report contains statistics on cases handled by both; however does not include Advance Pricing Agreement information, which is published in a separate report. Information presented includes number of requests received, cases resolved and pending cases.
April 27, 2016

Report Concerning Advance Pricing Agreements

On March 31, 2016 the Secretary of the Treasury issued its annual report to the public concerning advance pricing agreements and the Advance Pricing and Mutual Agreement Program corresponding to calendar year 2015. The report includes information on the structure, composition and operation of the Program, statistical data for 2015, and general descriptions of diverse elements in the advance pricing agreements executed during 2015, such as transactions covered, transfer pricing methods applied, and completion time.
March 31, 2016

Coordination of Transfer Pricing Rules with Other Code Provisions

This document includes final and temporary regulations, effective on September 14, 2015, that clarify the coordination of the application of the arm’s length standard and the best method rule under section 482 of the Internal Revenue Code in conjunction with other provisions of the Internal Revenue Code. There is particular emphasis on the analysis of transfers of intangible property, including examples demonstrating coordination of section 482 with other sections of the Internal Revenue Code.
September 16, 2015

IRS Releases Transfer Pricing Audit Roadmap

The IRS has developed a Transfer Pricing Audit Roadmap to provide transfer pricing practitioners with audit techniques and tools to assist with the planning, execution and resolution of transfer pricing examinations.
February 17, 2014

IRS Releases Draft Procedure Related to APA Transparency

Proposal reflects structural changes undertaken by the IRS since 2006, including the establishment of the Large Business & International Division and the creation of the Advance Pricing and Mutual Agreement Program.
November 22, 2013

IRS Finalizes Cost Sharing Rule Describing New Specified Application of Income Method

Cost sharing rule that describes a new specified application of the income method in Section 482-7(g)(4) for directly determining the arm's length charge for platform contribution transactions, or buy-in payments.
August 26, 2013

IRS Seeks Comments on Bilateral Safe Harbors for Certain Transfer Pricing Issues

The IRS specifically seeks comments on bilateral safe harbors with regard to arm’s length compensation for routine distribution functions.
March 15, 2013

Chipmaker Altera and IRS in Transfer Pricing Case

The IRS is seeking $27 million in tax payments, contending that from 2004 through 2007 Altera wrongly booked expenses for employee stock-based compensation in the United States where the expenses were tax deductible, according to court records.
July 24, 2012

American Bar Association's Section of Taxation Issues Letter to IRS Commissioner Shulman Regarding the Advance Pricing Agreement Program

ABA's Section of Taxation provides comments on the advance pricing and mutual agreement program, and focus on ways the program can be improved. Particularly, the comments address (i) developing safeguards to ensure the prevention of double taxation; (ii) efficiency; (iii) treatment of renewal APA Requests; and (iv) information policies in the prior APA program.
January 5, 2012

Proposed Revocation of a Customs Ruling Letter Relating to Post-Importation Adjustments; Transfer Pricing; Related Party Transactions; and Reconciliation

U.S. Customs is proposing to consider recognizing downward adjustments in a transfer price for imported merchandise, made after the date of entry, when the reduction in price is in conformity with an existing corporate transfer pricing policy. The recognition of a post-entry decrease in price would prompt a right to a refund in duties. The specific issue addressed in the policy statement will be whether a post-entry adjustment which was made to conform to an international transfer pricing tax compliance program will be recognized for Customs purposes.
December 28, 2011

Prepared Remarks of IRS Commissioner Doug Shulman before the 24th Annual Institute on Current Issues in International Taxation

Commissioner Shulman's remarks discuss how the IRS is establishing networks of experts, including international examiners, lawyers, economists, and others, to collaborate on tax issues.  The Commissioner highlighted the transfer pricing practice as an area that had been "a bit scattered," so the IRS created a single program under a single executive.  The Commissioner also talked about a successful joint audit with another country of a tax payer with a transfer pricing issue.  In six months, the two governments worked together to solve the complex issue, and a transfer pricing methodology was agreed on for future years.
December 15, 2011

Western Union/First Data Settles $2 Billion Transfer Pricing Litigation

The Western Union Company announced that it has reached an agreement with the IRS resolving all remaining issues related to the restructuring of its international operations in 2003. The agreement covers Western Union's tax treatment for imputed intangibles income, trademark buy-in royalties, and other items. As a result of the agreement, the Company will make cash payments to the and various state tax authorities of approximately $220 million, which are in addition to a $250 million tax deposit made with the IRS in 2010 connected to the potential liability.
December 15, 2011

U.S. Customs and Border Protection Requests Advance Public Comments on Treatment Relating to the Applicability of Transaction Value and Post-Importation Adjustments

Many importations into the United States involve transactions between related parties, which present a number of appraisement issues, such as ensuring that the relationship between the parties does not affect the price. Moreover, such transactions often involve arrangements in which the parties have in place formal inter-company policies that call for adjustments after importation to the price paid (i.e., the transfer price). These arrangements raise the issue of whether transaction value is the proper basis of appraisement and, if so, how to treat the adjustments.
September 23, 2011

President Obama Adresses Transfer Pricing in Plan for Economic Growth and Deficit Reduction

The plan's proposals aim to reduce the nation's deficit by $19 billion over 10 years. "Notwithstanding the transfer pricing rules, there is evidence of income shifting offshore, including through transfers of intangible rights to subsidiaries that bear little or no foreign income tax. Under the proposal, if a US parent transfers an intangible to a controlled-foreign corporation (CFC) in circumstances that demonstrate excessive income shifting from the US, then an amount equal to the excessive return would be treated as subpart F income."
September 19, 2011

IRS Announces its Realignment of the Advance Pricing Agreement Program and Mutual Agreement Program

The IRS' Advance Pricing Agreement Program and its Mutual Agreement Program will shift from the office of IRS Chief Counsel to an office under the Transfer Pricing Director in the Large Business & International division. Effectively, the two programs will be under a single executive.
July 27, 2011

IRS Guidance on Uncertain Tax Positions

The IRS offered guidance to taxpayers about reporting their uncertain tax positions to the government, addressing key questions surrounding the recording of a tax reserve.
July 19, 2011

Prepared Remarks of IRS Deputy Commissioner Michael Danilack before the 61st Annual Midyear Meeting of the Tax Executive Institute

During the Tax Executives Institute’s 61st Midyear Conference in Washington, D.C., IRS Deputy Commissioner Michael Danilack announced that the IRS will soon name a new director for transfer pricing, and will initiate a new transfer pricing practice in the near future. Danilack also noted that the IRS will bring in more transfer pricing experts.
April 5, 2011

Customs Ruling on Advance Pricing Agreements

The U.S. Customs and Border Protection addressed the acceptability and documentation requirements of transfer pricing between related parties, the significance of Advance Pricing Agreements in determining customs value, and the treatment of downward price adjustments made after importation.  The Agency reaffirmed that the burden lies with the importer to establish that an APA methodology is an appropriate basis for customs value, as does the responsibility to provide sufficient documentary evidence of compliance.
December 10, 2010

Prepared Remarks of IRS Commissioner Doug Shulman before the 23rd Annual Institute on Current Issues in International Taxation

Commissioner Shulman's remarks discuss the IRS' efforts over the past year to resolve international corporate tax issues, such as transfer pricing. Transfer pricing has been a focus of the IRS, with the realignment of the international resources in the Large Business & International operating division; and the launch of a Transfer Pricing Pilot program, which identified a number of cases of potentially broad impact, and dedicated resources to the development of such cases. The Commissioner also singled out the migration of valuable intangibles through cost sharing arrangements as a controversial issue. The IRS aims to pick the right issues and taxpayers, and to quickly get to the core of the facts and the law and resolve the issues.
December 9, 2010

Memorandum by Office of Chief Counsel of the IRS Discusses Treatment of Difference between a Taxpayer’s Valuation for Customs Law Purposes and for Income Tax

The IRS Office of Chief Counsel concluded that the difference between valuations for customs purposes and for income tax purposes—resulting from a correct application of the “first sale” rule—does not violate IRC section 1059A when this difference qualifies under an exception provided by Reg. section 1.1059A-1(c)(2)(iv).
October 29, 2010

Transfer Pricing Sections of the Department of Treasury's General Explanations of the Administration's Fiscal Year 2011 Revenue Proposals

Controversy often arises concerning the value of intangible property transferred between related persons and the scope of the intangible property subject to Sections 482 and 367(d).  The proposal aims to clarify the definition of intangible property to include workforce in place, goodwill, and going concern value.  The proposal also would clarify that where multiple intangible properties are transferred, the Commissioner may value the intangible properties on an aggregate basis where that achieves a more reliable result.  In addition, the proposal would clarify that the Commissioner may value intangible property taking into consideration the prices or profits that the controlled taxpayer could have realized by choosing a realistic alternative to the controlled transaction undertaken. Lastly, under the proposal, if a U.S. person transfers an intangible asset from the United States to a related controlled foreign corporation that is subject to a low foreign effective tax rate in circumstances that evidence excessive income shifting, then an amount equal to the excessive return would be treated as subpart F income in a separate foreign tax credit limitation basket.
February 2010


IRS PRACTICE UNITS

IRS Practice Units provide IRS staff with explanations of general international tax concepts as well as information about a specific type of transaction. Practice Units are not official pronouncements of law or directives and cannot be used, cited or relied upon as such. Practice Units provide a general discussion of a concept, process or transaction and are a means for collaborating and sharing knowledge among IRS employees. Practice Units may not contain a comprehensive discussion of all pertinent issues, law or the IRS's interpretation of current law. Practice Units do not limit an IRS examiner’s ability to use other approaches when examining issues. Below is a partial list of Practice Units that are particularly relevant to Transfer Pricing.

    ISIC_06_04 - Comparison of Arm's Length Std with Other Valuation Approaches - Inbound (September 2016)
    ISOC_01_03 - Comparison of Arm's Length Standard with Other Valuation Approaches Outbound (September 2016)
    ISOCUP_1_10_01 - Corporate Inversions - Overview of Major Issues (July 2016)
    ISI9422_07_08 - Inbound Resale Price Method Routine Distributor (March 2016)
    ISO9411_07_02 - Outbound Services by U.S. Companies to CFCs (March 2016)
    ISOPUOP_1_7_02- Review of Transfer Pricing Documentation by Outbound Taxpayers (March 2016)
    ISOPUOP_1_7_04 - Residual Profit Split Method – Outbound (March 2016)
    ISO9411_01_06 - Change in Participation in a Cost Sharing Arrangement - Controlled Transfer of Interests and Capability Variation (February 2016)
    ISI9422_08_01 - Intercompany Interest Rates Under the Situs Rule of IRC Section 482 (February 2016)
    ISO9411_01_02 - Pricing of Platform Contribution Transaction in Cost Sharing Arrangements (February 2016)
    IGA9560_11_06 - Calculating the Net Adjustment Penalty for a Substantial Valuation Misstatement (February 2016)
    ISIPUOP_6_9_04 - Residual Profit Split Method - Inbound (February 2016)
    ISO9411_02_03 - License of Intangible Property from U.S. Parent to a Foreign Subsidiary (November 2015)
    ISO9411_02_04 - Accounting for Intangibles and Services Associated with the Sale of Tangible Property - Outbound (September 2015)
    ISOPUOV_1_01 - Comparability Analysis for Tangible Goods Transactions - Outbound (December 2014)
    ISO9411_05_01 - Sale of Tangible Goods from a CFC to a USP - CUP Method (December 2014)
    ISO9411_01_03 - Cost Sharing Arrangements vs Licensing Alternative (December 2014)
    ISO9411_01_01 - Pricing of Platform Contribution Transaction in Cost Sharing Arrangements - Initial Transaction (December 2014)
    ISIPUOV_6_10 - Review of Transfer Pricing Documentation by Inbound Taxpayers (December 2014)
    ISIPUOV_6_01 - Comparability Analysis for Tangible Goods Transactions - Inbound (December 2014)
    ISI9422_09_05 - Services Cost Method Inbound Services (December 2014)
    ISI9422_09_04 - Best Method Determination for an Inbound Distributor (December 2014)
    ISI9422_09_01 - Foreign Shareholder Activities and Duplicative Services (December 2014)
    ISI9422_07_05 - Purchase of Tangible Goods from a Foreign Parent - CUP Method (December 2014)
    ISI9422_04_01 - License of Foreign Owned Intangible Property to U.S. Entity (December 2014)

For professional transfer pricing consulting services, contact Economic Consulting Services at 202-466-7720.
Or email jerrie.mirga@economic-consulting.com