IRS Moving Transfer Pricing to the Front Burner

International tax took center stage last week when the temporary Treasury regulations on tax inversions put an end to the proposed merger between Pfizer and Allergen. In addition to that, recent announcements by the IRS are making waves in international tax and transfer pricing circles. 

The IRS is giving its agents detailed guidelines on what to look for in transfer pricing audits, requiring them to take a broader view when applying principles very similar to those seen under base erosion and profit shifting (“BEPS”), and advising agents to receive increased training in this area. 

The IRS has decided to take a more holistic view of the value chain of related parties in order to assess whether the U.S. subsidiary is paying the foreign parent arms-length pricing in its intercompany dealings and if there’s a significant disparity in net income between the subsidiary and foreign parent. The IRS is also looking at various business structures and taking a more granular look at common control for purposes of applying IRC Section 482.

While having the proper transfer pricing documentation is crucial, businesses will now also have to provide the IRS with a complete understanding of the company's controlled transactions. Thus, a company can still end up in a protracted audit setting even if it submits the required documents. Essentially, the transfer pricing reflected in the documentation must align with the value chain and business reality of the taxpayer. So what can your company do to make your transfer pricing policy and documentation defensible and thus prevent costly, protracted action by the IRS?

• Assess and align your transfer pricing with your overall position in the value chain.
• Review your current tax structure and align it with your business reality.
• Make sure your transfer pricing documentation is well-prepared and up-to-date.