U.S. Transfer Pricing Regulations

Section 482 of the Internal Revenue Code (IRC) provides the authority for the Internal Revenue Service (IRS) to make allocations between controlled parties to clearly reflect the income of each of the parties.

Section 482 and Treas. Reg. §1.482-1 through §1.482.9 (the U.S. Transfer Pricing Regulations) require that prices charged in intercompany transactions (involving goods, services, or intangibles) yield results consistent with what uncontrolled taxpayers would achieve under the same circumstances (“arm’s-length” prices). In determining whether the result of a controlled transaction is arm’s length, taxpayers must use the method that, under the facts and circumstances, provides the most reliable measure of an arm’s length result.

Other technical aspects covered by the regulations include the comparability analysis, selection and application of the method depending on the type of transaction, statistical measures and adjustments.

In general, the U.S. Transfer Pricing Regulations are consistent with the OECD Transfer Pricing Guidelines. However, significant technical aspects may differ, such as for instance the arm’s length range calculation.

While the preparation of transfer pricing documentation is voluntary, it is highly advisable to have it to defend the taxpayer transfer pricing position and to avoid not only adjustments but hefty penalties under Section 6662 of the IRC for inaccurate transfer pricing. Furthermore, adequate documentation supporting the taxpayer’s transfer pricing position has proven to be the best strategy in case of an examination or an audit by the IRS.

To provide penalty protection, the transfer pricing documentation also referred to as the transfer pricing study should meet the Section 6662(e) requirements and exist when the tax return is filed and be provided to the IRS within 30 days of a request.

The documentation should include the following:

An overview of the taxpayer’s business.

A description of the taxpayer’s organizational structure.

A description of the method selected and an explanation of why that method was selected.

A description of the alternative methods that were considered and an explanation of why they were not selected.

A description of the controlled transactions.

A description of the comparables that were used.

An explanation of the economic analysis and projections relied upon in developing the method.

In 2016, United States implemented the Country-by-Country Reporting (CbCR) through Form 8975 and Schedule A. This applies to multinational group with a U.S. ultimate parent company and global revenue exceeding USD 850 million in the prior tax period. If applicable, the ultimate U.S. parent entity must file the Form 8975 and corresponding Schedule A alongside its tax return.

Unlike some other countries that adopted the BEPS Action 13, United States does not mandate a separate master file or local file since the existing transfer pricing documentation is considered to be sufficient by capturing the equivalent information.

The IRS has significantly bolstered its transfer pricing enforcement capabilities since 2012 with the creation of the Transfer Pricing Practice (TPP). This specialized unit has played a crucial role in improving the IRS success in transfer pricing litigation. Furthermore, higher number of transfer pricing audits is expected since the IRS is devoting more resources to enforcement including hiring experts as well as using advance data analysis tools for case selection.

Country by Country Report
ApplicableYes. According to Treas. Reg. §1.6038-4 And consistent with Annex III to Chapter V of the OECD Transfer Pricing Guidelines.
Filling RequirementsU.S. ultimate parent entity of a multinational group must file Form 8975 and corresponding Schedule A alongside its tax return.
Due DateFor C corporations by the 15th day of the fourth month following the close of its tax year (April 15th for calendar year taxpayers). An additional six-month extension can be obtained (October 15th for calendar year taxpayers).
ThresholdUSD 850 million of prior year group’s consolidated revenue.
NotificationsNo
Master File
ApplicableNo
Local File / Transfer Pricing (TP) Documentation
Applicable

Yes. TP Documentation that meets Section 6662(e) requirements may reduce or eliminate penalties.

1.      An overview of the taxpayer’s business;

2.      A description of the taxpayer’s organizational structure;

3.      Any documentation explicitly required by Treas. Reg. §1.482-1 through 1.482-9;

4.      A description of the method selected and an explanation of why that method was selected;

5.      A description of the alternative methods that were considered and an explanation of why they were not selected;

6.      A description of the controlled transactions;

7.      A description of the comparables that were used;

8.      An explanation of the economic analysis and projections relied upon in developing the method;

9.      A description or summary of any relevant data that the taxpayer obtains after the end of the tax year and before filing a tax return; and,

10.  A general index of the principal and background documents.

ThresholdNo
SubmissionNo. Documentation requirements are voluntary but necessary to ensure penalty protection.
Submission / Preparation DateTax return filling date. For penalty protection, documentation must be in existence when the tax return is filed.
Timing Requirement to Tax Authority30 days upon request.
Penalties

Yes. There are penalties for inaccurate transfer pricing as specified in Section 6662(e) that can be assessed as an additional 20 percent or 40 percent of the tax underpayment:

–          The Transactional Penalty applies at a 20 percent rate where the misstated transfer price for any property or service is 200 percent or more, or 50 percent or less, of the correct price. The Transactional Penalty applies at a 40 percent rate if the misstated transfer price is 400 percent or more, or 25 percent or less, of the correct price.

–          The Net Adjustment Penalty applies at a 20 percent rate if the total net transfer pricing adjustment for the year is more than USD 5 million or 10 percent of gross receipts. The Net Adjustment Penalty applies at a 40 percent rate if the adjustment is more than USD 20 million or 20 percent of gross receipts.

Transfer pricing documentation that meets Section 6662(e) requirements and Treas. Reg. § 1.6662-6 (in existence when the tax return is filed and provided to the tax authority within 30 days upon request) may eliminate those penalties.

Despite no penalties are directly associated with failure to submit TP documentation, preparing an adequate TP study is the best strategy in case of an examination or audit by the tax authority.

TP FormNo. However certain information relevant to controlled transactions must be reported on Forms 5471 and 5472 information returns filed alongside the tax return.