Transfer Pricing GLOBAL PRACTICE GUIDES - USA - Morgan Lewis
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GLOBAL PRACTICE GUIDES Definitive global law guides offering comparative analysis from top-ranked lawyers Transfer Pricing USA Sanford W. Stark, Thomas V. Linguanti, Rod Donnelly and Saul Mezei Morgan, Lewis & Bockius LLP practiceguides.chambers.com 2021
USA
Law and Practice
Contributed by:
Sanford W. Stark, Thomas V. Linguanti, Rod Donnelly
and Saul Mezei
Morgan, Lewis & Bockius LLP see p.20
CONTENTS
1. Rules Governing Transfer Pricing p.4 8. Penalties and Documentation p.12
1.1 Statutes and Regulations p.4 8.1 Transfer Pricing Penalties and Defences p.12
1.2 Current Regime and Recent Changes p.4 8.2 Taxpayer Obligations under the OECD Transfer
Pricing Guidelines p.13
2. Definition of Control/Related Parties p.5
2.1 Application of Transfer Pricing Rules p.5 9. Alignment with OECD Transfer Pricing
Guidelines p.13
3. Methods and Method Selection and 9.1 Alignment and Differences p.13
Application p.5 9.2 Arm’s-Length Principle p.14
3.1 Transfer Pricing Methods p.5 9.3 Impact of BEPS p.14
3.2 Unspecified Methods p.6 9.4 Entities Bearing the Risk of Another Entity’s
3.3 Hierarchy of Methods p.6 Operations p.14
3.4 Ranges and Statistical Measures p.6
10. Relevance of the United Nations Practical
3.5 Comparability Adjustments p.6
Manual on Transfer Pricing p.14
4. Intangibles p.7 10.1 Impact of UN Practical Manual on Transfer
Pricing p.14
4.1 Notable Rules p.7
4.2 Hard-to-Value Intangibles p.7 11. Safe Harbours or Other Unique Rules p.15
4.3 Cost Sharing/Cost Contribution Arrangements p.8 11.1 Transfer Pricing Safe Harbours p.15
11.2 Rules on Savings Arising from Operating in the
5. Affirmative Adjustments p.8
Jurisdiction p.15
5.1 Rules on Affirmative Transfer Pricing Adjustments p.8
11.3 Unique Transfer Pricing Rules or Practices p.15
6. Cross-Border Information Sharing p.9
12. Co-ordination with Customs Valuation p.15
6.1 Sharing Taxpayer Information p.9
12.1 Co-ordination Requirements between Transfer
7. Advance Pricing Agreements p.10
Pricing and Customs Valuation p.15
7.1 Programmes Allowing for Rulings Regarding 13. Controversy Process p.16
Transfer Pricing p.10
13.1 Options and Requirements in Transfer Pricing
7.2 Administration of Programmes p.10 Controversies p.16
7.3 Co-ordination between the APA Process and
Mutual Agreement Procedures p.10 14. Judicial Precedent p.17
7.4 Limits on Taxpayers/Transactions Eligible for an 14.1 Judicial Precedent on Transfer Pricing p.17
APA p.11 14.2 Significant Court Rulings p.17
7.5 APA Application Deadlines p.11
7.6 APA User Fees p.11 15. Foreign Payment Restrictions p.18
7.7 Duration of APA Cover p.11 15.1 Restrictions on Outbound Payments Relating to
Uncontrolled Transactions p.18
7.8 Retroactive Effect for APAs p.11
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USA CONTENTS
15.2 Restrictions on Outbound Payments Relating to 17. COVID-19 p.19
Controlled Transactions p.18 17.1 Impact of COVID-19 on Transfer Pricing p.19
15.3 Effects of Other Countries’ Legal Restrictions p.18 17.2 Government Response p.19
16. Transparency and Confidentiality p.18 17.3 Progress of Audits p.19
16.1 Publication of Information on APAs or Transfer
Pricing Audit Outcomes p.18
16.2 Use of “Secret Comparables” p.19
3
LAW AND PRACTICE USA
Contributed by: Sanford W. Stark, Thomas V. Linguanti, Rod Donnelly and Saul Mezei
Morgan, Lewis & Bockius LLP
1. RULES GOVERNING 1.2 Current Regime and Recent
TRANSFER PRICING Changes
The government’s authority to regulate the
1.1 Statutes and Regulations allocation of income between related parties
In the United States, the rules of transfer pricing stretches back to regulations that were enacted
are established statutorily in Section 482 of the in 1917. The current Section 482 has its origins in
Internal Revenue Code (the “Code”) and regula- Section 45 of the 1928 Code, which was largely
torily in the Treasury regulations beginning with unchanged until revisions in 1986. In 1986, Sec-
Section 1.482-0. tion 482 was amended to incorporate the “com-
mensurate with income standard” with respect to
The statute itself is brief, merely one paragraph in the transfer of intangible property. More recently,
length with no subsections. Its role is to establish in 2017, Section 482 was amended as part of
the government’s authority to reallocate income the Tax Cuts and Jobs Act to capture concepts
“in order to prevent evasion of taxes or clearly to that previously had been embodied solely in the
reflect the income” among related parties. Treasury regulations, namely with respect to the
“aggregation” of transactions among related
The US Department of Treasury (“Treasury”) reg- parties in certain circumstances and the con-
ulations, on the other hand, are extraordinarily sideration of “realistically available alternatives”
detailed and extensive (beginning with Treasury when valuing intangible property transfers.
Regulation Section 1.482-0 through 1.482-9),
establishing the various valuation methods and The “lingua franca” of transfer pricing jurispru-
transfer pricing rules to be applied in multiple dence, the “arm’s-length standard”, is not part of
circumstances, such as the provision of loans Section 482, though, and has never been. How-
or advances, the transfer of tangible or intangi- ever, it has been embodied in US transfer pricing
ble goods, or the rendering of services among law since the 1920s as part of the Treasury regu-
related parties. lations. The Treasury regulations, likewise, have
been through multiple revisions and refinements
The US Internal Revenue Service (IRS) also regu- over the years, the most significant being revi-
larly issues revenue rulings, revenue procedures, sions that followed the “1988 White Paper” that
agency directives and any number of other had been commissioned by the US Congress to
“informal” pronouncements (neither statutes nor study and evaluate US transfer pricing. That led,
regulations) that attempt to address questions in 1994, to the most extensive revisions to the
of interpretation or enforcement of the transfer transfer pricing regulations since their inception.
pricing provisions.
Among the most significant changes that arose
Finally, there is a long line of federal court deci- out of those 1994 changes was to make clear
sions that have interpreted Section 482 and the that in doing transfer pricing valuation, there is
applicable regulations and pronouncements that no “hierarchy of methods”, which had been a
must be consulted when considering transfer major area of dispute for many years. In other
pricing issues. words, in considering all of the various meth-
ods available to determine the “best method”
that ensures that related parties are pricing their
transactions in accordance with arm’s-length
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USA LAW AND PRACTICE
Contributed by: Sanford W. Stark, Thomas V. Linguanti, Rod Donnelly and Saul Mezei
Morgan, Lewis & Bockius LLP
standards, there is no method that is preferred 3. METHODS AND
over any other. METHOD SELECTION AND
A P P L I C AT I O N
Moreover, because perhaps the most conten-
tious transfer pricing area in the last 25 years 3.1 Transfer Pricing Methods
has been related to “cost sharing agreements” US laws list a number of specific transfer pric-
with respect to the transfer and development of ing methods that taxpayers can use depending
intangibles, there have been many significant on whether the transfers among related parties
revisions to the regulations on that issue as well relate to tangible property, intangible property
in the past 10-15 years. Indeed, in the 1968 ver- (including cost sharing transactions) or services.
sion of the regulations, cost sharing consisted of
one paragraph. Today, Treasury Regulation Sec- With respect to the transfer of tangible property,
tion 1.482-7 (sharing of costs) is arguably among the methods are the:
the most detailed and complex provisions of the
Treasury regulations related to transfer pricing. • comparable uncontrolled price (CUP) method;
• resale price method;
• cost plus method; and
2. DEFINITION OF • unspecified methods.
C O N T R O L / R E L AT E D
PA R T I E S With respect to the transfer of intangible prop-
erty, the methods are the:
2.1 Application of Transfer Pricing
Rules • comparable uncontrolled transaction (CUT)
The US transfer pricing rules apply to so-called method; and
controlled transactions. The rules do not require • unspecified methods.
technical control (ie, they do not require that
one party to the transaction own any specified Transactions involving the transfer of tangible
percentage of another party to the transaction). or intangible property are both also subject to
Instead, the test for determining whether a con- evaluation under the:
trolled transaction exists (and therefore whether
the IRS can apply the transfer pricing rules to • comparable profits method; and
reallocate income) is a flexible test that allows • profit split method, which includes the:
the IRS to apply the transfer pricing rules in cas- (a) comparable profit split method; and
es of common ownership (direct or indirect) but (b) residual profit split method.
also where there is no technical ownership if the
parties to the transaction are “acting in concert” With respect to cost sharing arrangements spe-
with a common goal of shifting income. cifically, the methods for valuing any platform
contribution of intangibles to such an arrange-
ment are the:
• CUT method;
• income method;
• acquisition price method;
• market capitalisation method;
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LAW AND PRACTICE USA
Contributed by: Sanford W. Stark, Thomas V. Linguanti, Rod Donnelly and Saul Mezei
Morgan, Lewis & Bockius LLP
• residual profits split method; and The “arm’s-length range” acknowledges that
• unspecified methods. often the arm’s-length price of a good or service
or profits of an enterprise will be within a range
With respect to the transfer of services, the of results and will not be a single point. So long
methods are the: as taxpayers can demonstrate that their results
are within that range, then the government will
• services cost method; not adjust the prices or profits determined. If,
• comparable uncontrolled services price however, the government determines that the
(CUSP) method; taxpayer’s price or resulting profits are outside
• gross services margin method; the taxpayer’s range or a range determined by
• cost of services plus method; the government by a same or different method,
• comparable profits method; then the government will adjust the taxpayer’s
• profit split method; and results accordingly. When a taxpayer’s or the
• unspecified methods. IRS’s analysis produces a range of results rath-
er than a single point, the Treasury regulations
Transactions among related parties with respect generally support use of the interquartile range
to loans or advances or cost sharing agreements of those results to evaluate arm’s-length pricing,
also have detailed regulatory requirements that rather than the full range of results, unless all the
must be satisfied to determine whether those data points in the range are of sufficiently high
transactions are in accordance with arm’s-length reliability as to warrant use of the full range.
principles.
3.5 Comparability Adjustments
3.2 Unspecified Methods The US requires comparability adjustments. In
Under US law, all transactions among related determining whether transactions are “compa-
parties may utilise an “unspecified” method if it rable” in the first instance for purposes of deter-
is the “best method” to determine arm’s-length mining whether the taxpayer’s related-party
results. transactions have been conducted in accord-
ance with the arm’s-length standard, there are
3.3 Hierarchy of Methods a number of factors that are to be considered.
Since 1994, there is no “hierarchy” of methods And, to the extent that there are differences
set forth in the transfer pricing laws of Section between the related-party transaction and the
482 of the Code or Section 1.482-0, et seq of the third-party transaction, adjustments for these
Treasury regulations. However, US courts histori- comparability factors should be considered as
cally have shown a preference for transactional- well. These factors for determining (and adjust-
based methods, such as the CUT or CUP meth- ing for) comparability include, in summary:
ods, in appropriate circumstances.
• functions performed;
3.4 Ranges and Statistical Measures • contractual terms;
The US has no direct “statistical measure” • risks assumed;
requirement, other than to the extent that statis- • economic and financial conditions;
tics are used as tools within the various specified • nature of property or services transferred; and
or unspecified methods. • special circumstances, such as:
(a) market share strategy; and
(b) different geographical markets (eg, loca-
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USA LAW AND PRACTICE
Contributed by: Sanford W. Stark, Thomas V. Linguanti, Rod Donnelly and Saul Mezei
Morgan, Lewis & Bockius LLP
tion savings). residual “unspecified method” (in Section 1.482-
4(d)), which must satisfy certain criteria.
4 . I N TA N G I B L E S
Section 1.482-4 also provides – in addition to
4.1 Notable Rules two of the possible methods for determining the
Transfer pricing under US law is governed pri- arm’s-length pricing in an intangibles transfer –
marily by Section 482 of the Code and its imple- special rules for transfers of intangibles. These
menting Treasury regulations, together with the include rules implementing the CWI standard
“Associated Enterprises” Article (usually Article (Section 1.482-4(f)(2) – “Periodic adjustments”),
9) of US tax treaties (if a transfer pricing issue rules for determining the owner of intangible
involves an associated enterprise in a treaty property (Section 1.482-4(f)(3)), and rules for
jurisdiction). The second sentence of Section determining contributions to the value of intan-
482, from which the IRS gets authority to make gible property owned by another.
transfer pricing adjustments, provides: “In the
case of any transfer (or license) of intangible Section 1.482-4 provides the specific methods
property (within the meaning of [section 367(d) to be used to determine arm’s-length results of
(4)]), the income with respect to such transfer or a transfer of intangible property, including in an
license shall be commensurate with the income arrangement for sharing the costs and risks of
attributable to the intangible.” developing intangibles other than a cost sharing
arrangement covered by Section 1.482-7. Sec-
This is called the “commensurate with income” tion 1.482-7 provides very detailed rules for cost
(CWI) standard. When the CWI standard was sharing arrangements.
added to the Code in 1986, “intangible prop-
erty” was defined in Section 936(h)(3)(B), but 4.2 Hard-to-Value Intangibles
in 2017 the definition was expanded to include Treasury regulations addressing controlled trans-
“goodwill, going concern value, or workforce actions involving intangible property pre-date
in place (including its composition and terms and differ slightly from Organisation for Eco-
and conditions (contractual or otherwise) of its nomic Co-operation and Development (OECD)
employment)”. The prior version had a residual guidance on hard-to-value intangibles (HTVI),
category, “any similar item, which has substan- which are a subset of intangibles.
tial value independent of the services of any indi-
vidual”. This was revised in 2017 to read “other Base erosion and profit shifting (BEPS) Actions
item the value or potential value of which is not 8–10 reports treat the HTVI approach as part of
attributable to tangible property or the services the arm’s-length principle. HTVI are intangibles
of any individual”. for which, (i) at the time of their transfer, no suf-
ficiently reliable comparables exist; and (ii) at the
Treasury Regulation Section 1.482-4 governs time the transaction was entered into (a) the pro-
transfer pricing of intangibles. It points to three jections of future cash flows/income expected to
specified methods for determining the arm’s- be derived from the transferred intangibles, or (b)
length consideration for the transfer of an intan- the assumptions used in valuing the intangibles
gible – the comparable uncontrolled transaction are highly uncertain. If HTVI requirements are
method (in Section 1.482-4(c)), the comparable met, in evaluating the ex ante pricing arrange-
profits method (in Section 1.482-5) and the prof- ments, a tax administration is entitled to use
it split method (in Section 1.482-6) – and to a the ex post evidence about financial outcomes
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LAW AND PRACTICE USA
Contributed by: Sanford W. Stark, Thomas V. Linguanti, Rod Donnelly and Saul Mezei
Morgan, Lewis & Bockius LLP
to inform the determination of the arm’s-length 4.3 Cost Sharing/Cost Contribution
pricing arrangements. Arrangements
The US recognises research and development
The HTVI approach will not apply if any one of cost sharing arrangements. Major versions of
four exemptions applies. Treasury regulations addressing cost sharing
arrangements were issued in 1968 (one para-
By contrast, US federal law takes a slightly differ- graph), 1995 (15 pages), 2009 (61 pages) and
ent approach, applicable not to a special class of 2011 (77 pages), with amendments along the
intangibles, but rather to all intangibles. In 1986, way. The 1995 cost sharing regulations have
Section 482 of the Code was augmented with been the subject of three large Tax Court cases:
the CWI standard. In 1988, Treasury and the IRS
agreed to interpret and apply the CWI stand- • Veritas Software Corp. v Commissioner, 133
ard consistently with the arm’s-length standard T.C. 297 (2009) (buy-in issue), nonacq. 2010-
(Notice 88-123, 1988-2 C.B. 458, 475). The Tax 49 I.R.B.;
Court explained that Congress never intended • Altera Corp. & Subs. v Commissioner, 145
the CWI standard to override the arm’s-length T.C. 91 (2015), rev’d, 926 F.3d 1061 (9th Cir.
standard (Xilinx, Inc. v Commissioner, 125 T.C. 2019), en banc rehearing petition denied, 941
37, 56–58, aff’d 598 F.3d 1191 (9th Cir. 2010)). F.3d 1200 (9th Cir. 2019) (validity upheld of
requirement to share stock-based compensa-
Subparagraph 1.482-4(f)(2)(i) (the “periodic tion costs of intangibles); and
adjustment rule”) implements the CWI stand- • Amazon.com, Inc. v Commissioner, 148 T.C.
ard, providing that if an intangible is transferred 108 (2017), aff’d, 934 F.3d 976 (9th Cir. 2019)
under an arrangement that covers more than (buy-in issue, and pool of intangible develop-
one year, the consideration charged in each ment costs).
year may be adjusted to ensure that it is com-
mensurate with the income attributable to the Currently, there is one docketed Tax Court case
intangible. Further, in determining whether to addressing the 2009 Temporary regulations’
make such adjustments in a taxable year under determination of the “PCT Payment” (the suc-
examination, the IRS may consider all relevant cessor of the “buy-in” payment provision under
facts and circumstances throughout the period the 1995 regulations).
the intangible is used.
Subparagraph 1.482-4(f)(2)(ii) gives five excep- 5 . A F F I R M AT I V E
tions from application of the periodic adjustment ADJUSTMENTS
rule. These exceptions to some extent mirror the
four exceptions from application of the HTVI rule, 5.1 Rules on Affirmative Transfer
but there are differences. For example, Section Pricing Adjustments
1.482-4(f)(2)(ii)(A) provides that if pricing is based Treasury regulations under Section 482 do not
on an exact comparable uncontrolled transac- allow a taxpayer to make an affirmative transfer
tion, then no period adjustment can be made. pricing adjustment after filing a tax return. Sec-
If a CUT exits, however, then the intangibles by tion 1.482-1(a)(3) – entitled “Taxpayer’s use of
definition are not HTVI. section 482” – provides: “If necessary to reflect
an arm’s length result, a controlled taxpayer may
report on a timely filed U.S. income tax return
8USA LAW AND PRACTICE
Contributed by: Sanford W. Stark, Thomas V. Linguanti, Rod Donnelly and Saul Mezei
Morgan, Lewis & Bockius LLP
(including extensions) the results of its controlled with the income attributable to the intangible”)
transactions based upon prices different from nominally applies both to the IRS and to taxpay-
those actually charged. Except as provided in ers. Accordingly, it may be possible for a tax-
this paragraph, section 482 grants no other right payer to assert that the CWI standard gives it the
to a controlled taxpayer to apply the provisions right – for example, in the case of a transfer of
of section 482 at will or to compel the district intangible property – to override Section 1.482-
director to apply such provisions. Therefore, no 1(a)(3), thereby prohibiting IRS adjustments with
untimely or amended returns will be permitted to respect to the transfer that exceed the actual
decrease taxable income based on allocations income attributable to the intangible. This asser-
or other adjustments with respect to controlled tion would assuredly be challenged by the IRS;
transactions.” this issue has never been addressed by a court.
Notwithstanding Section 1.482-1(a)(3), there are
at least two established exceptions – one regula- 6. CROSS-BORDER
tory and one judicial. I N F O R M AT I O N S H A R I N G
The regulatory exception addresses set-offs 6.1 Sharing Taxpayer Information
under Treasury Regulation Section 1.482-1(g)(4). The United States is a party to a vast tax treaty
Suppose, for example, that in a taxable year, B network that allows for extensive “exchange
pays A an above-arm’s-length price in a con- of information” among countries. Exchange of
trolled transaction. If, with respect to another information (EOI) agreements generally authorise
controlled transaction between A and B, in the the IRS to assist and share tax information with
same taxable year, the IRS makes a Section 482 non-US countries to enable that state to admin-
adjustment increasing A’s income, then A can ister its own tax system and, of course, vice ver-
use as a set-off against (ie, reduction of) the IRS sa. These EOI agreements are memorialised in
adjustment the overpayment (ie, excess above various forms, including bilateral tax treaties, tax
arm’s-length amount) A received from B in the information exchange agreements (TIEAs) and
different controlled transaction. multilateral treaties, such as the OECD/Council
of Europe Convention on Mutual Administrative
The judicial exception ties to a line of cases sup- Assistance in Tax Matters (the “Multilateral Con-
porting the proposition that if the IRS makes an vention”) and the Hague Convention on the Tak-
adjustment with respect to a taxpayer’s con- ing of Evidence Abroad in Civil or Commercial
trolled transaction, courts have authority to Matters (the “Hague Convention”).
determine the arm’s-length transfer pricing for
the transaction, even if that results in a refund for There are few limits on the types of taxes
the taxpayer (see, eg, Pikeville Coal Co. v U.S., (income, estate, etc) that may be the subject
37 Fed. Cl. 304 (1997), motion for reconsidera- of EOI requests, although each agreement has
tion denied, 37 Fed. Cl. 304 (1997); Ciba-Geigy particular limits on, or exceptions to, the type of
Corp. v. Commissioner, 85 T.C. 172 (1985)). information that may be exchanged or how that
information may be used among the “competent
Finally, the CWI standard was originally added in authorities” of each state. The US tax treaties in
1986 (tweaked slightly in 2017), after the progen- general, however, follow the US Model Treaty,
itor of Section 1.482-1(a)(3) arose. The language which provides in Article 26(1) that: “The com-
of the CWI standard (“shall be commensurate petent authorities of the Contracting States shall
9LAW AND PRACTICE USA
Contributed by: Sanford W. Stark, Thomas V. Linguanti, Rod Donnelly and Saul Mezei
Morgan, Lewis & Bockius LLP
exchange such information as may be relevant and Mutual Agreement Program (APMA). In late
for carrying out the provisions of this Convention 2020, APMA expanded to also include the Treaty
or of the domestic laws of the Contracting States Assistance and Interpretation Team (TAIT). TAIT
concerning taxes of every kind imposed by a seeks to resolve competent authority issues
Contracting State to the extent that the taxation arising under all other articles of US tax trea-
thereunder is not contrary to the Convention, ties. Since its inception, the United States’ APA
including information relating to the assessment programme has executed approximately 2,000
or collection of, the enforcement or prosecution APAs.
in respect of, or the determination of appeals in
relation to, such taxes. The exchange of informa- 7.2 Administration of Programmes
tion is not restricted by paragraph 1 of Article 1 APMA administers the APA programme. Accord-
(General Scope) or Article 2 (Taxes Covered).” ing to APMA’s most recently published APA
annual report, published in March 2020 and cov-
Under most EOI agreements with the US, there ering January through December 2019, at the
are few types of information that may not be end of 2019 “the APMA Program comprised 52
exchanged. Under many EOI agreements, how- team leaders, 16 economists, 6 managers and 3
ever, the US is not obligated to exchange infor- assistant directors” in addition to the Program’s
mation that it deems contrary to public policy or director. Individual teams include both team
that would disclose trade or business secrets, leaders and economists. APMA’s primary office
under the “Business Secret Exemption”. Also, is in Washington, DC, but it also has offices in
the US, like many European countries specifi- California, Illinois and New York. The teams are
cally, has various “data privacy” laws that like- aggregated into three groups according to the
wise may restrict or prevent the taxing authori- countries for which they are responsible, with
ties from exchanging certain types of information each group led by an assistant director and team
across borders as well. managers.
• Group A covers China, Denmark, Finland,
7. ADVANCE PRICING India, Ireland, Israel, Italy, Norway, Sweden,
AGREEMENTS Switzerland and the United Kingdom.
• Group B covers Australia, Austria, Belgium,
7.1 Programmes Allowing for Rulings Canada, Caribbean, Eastern Europe, France,
Regarding Transfer Pricing Germany, Kazakhstan, Luxembourg, Mexico,
The United States has a robust, well-developed Netherlands, New Zealand, Portugal, Puerto
advance pricing agreement (APA) programme. Rico, Russia, Spain and Venezuela.
The programme dates back to the early 1990s, • Group C covers Guam, Indonesia, Japan,
with the first APA completed in 1991. The APA Korea, Morocco, Philippines, South Africa
programme used to be located in the IRS’s and Thailand.
Office of Chief Counsel, but now is located in
the IRS’s Large Business and International Divi- 7.3 Co-ordination between the APA
sion. In 2012, the APA programme merged with Process and Mutual Agreement
the portion of the US Competent Authority office Procedures
charged with resolving transfer pricing disputes Both the APA process and mutual agreement
under the United States’ bilateral income tax procedures (MAPs) fall under the jurisdiction of
treaty network to create the Advance Pricing APMA, such that the same APMA teams and
10USA LAW AND PRACTICE
Contributed by: Sanford W. Stark, Thomas V. Linguanti, Rod Donnelly and Saul Mezei
Morgan, Lewis & Bockius LLP
personnel have responsibility for transfer pricing or multilateral APAs, APMA requires that the
matters regardless of whether they arise in an taxpayer file its completed APA request within
APA context or a MAP proceeding. 60 days of having filed its request with the for-
eign competent authority (bilateral) or authorities
7.4 Limits on Taxpayers/Transactions (multilateral).
Eligible for an APA
Generally, APAs are available to any US person 7.6 APA User Fees
(which includes domestic corporations and part- There are user fees associated with seeking an
nerships) and any non-US person that is expect- APA. For APA requests filed after 31 December
ed to file one or more US tax returns during the 2018, the fees are USD113,500 for new APAs,
years that address the issues to be covered by USD62,000 for renewal APAs, USD54,000 for
the proposed APA. As stated in Revenue Proce- small case APAs and USD23,000 for amend-
dure 2015-41, which governs APAs in the United ments. User fees can be mitigated if multiple
States, APAs generally “may resolve transfer APA applications are filed by the same controlled
pricing issues and issues for which transfer pric- taxpayer group within 60 days.
ing principles may be relevant...” As the Revenue
Procedure also states, “APMA may also need 7.7 Duration of APA Cover
to consider additional, interrelated issues, addi- There is no prescribed limit on the number of
tional taxable years... or additional treaty coun- years that can be covered by an APA. An APA
tries... in order to reach a resolution that is in the application should propose to cover at least five
interest of principled, effective, and efficient tax prospective years, and APMA seeks to have at
administration.” least three prospective years remaining at the
time the APA is executed. Rollback years, if any,
There are limits on APA access for issues that will add to the aggregate APA term. According
are, have been, or are designated to be subject to APMA’s most recently published APA annual
to litigation. report, the average term length of APAs execut-
ed in 2019 was 6 years, but the full range of
7.5 APA Application Deadlines terms spanned from 1 to 15 years.
APAs can include both prospective (future) years
and, where applicable, “rollback” (prior) years. 7.8 Retroactive Effect for APAs
Rollback years are addressed in 7.8 Retroactive An APA can cover not only future years, but also
Effect for APAs. Designation of the first pro- prior (or “rollback”) years. Rollback years are the
spective year of an APA application ties to the years of an APA term that precede the first pro-
timing of the filings of the taxpayer’s tax return spective year (see 7.5 APA Application Dead-
for the year and the taxpayer’s APA request. lines). A taxpayer seeking rollback coverage
Generally, the first prospective year is the year should include the rollback request in its APA
in which the taxpayer files a complete or suf- application, and APMA can suggest, or even
ficiently complete APA request by the “applica- require, the addition of rollback coverage when
ble return date”, which is the later of the date the taxpayer does not request it where the facts
the taxpayer actually files its US tax return for and circumstances are sufficiently similar across
the year or the statutory deadline for filing the the proposed prospective and rollback periods.
return without extensions. All proposed APA
years ending before the first prospective year
will be considered rollback years. For bilateral
11LAW AND PRACTICE USA
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Morgan, Lewis & Bockius LLP
8 . P E N A LT I E S A N D (B)(i)) applies if the tax return-reported price for
D O C U M E N TAT I O N any property or services, on a transaction-by-
transaction basis, is 200% or more, or 50% or
8.1 Transfer Pricing Penalties and less, than the correct Section 482 price. For the
Defences corresponding gross valuation misstatement
Specific US Transfer Pricing Penalties penalty, replace 200% by 400%, and 50% by
Transfer pricing penalties under the Code and 25%.
Treasury regulations
Section 6662 of the Code – entitled “Imposi- The net Section 482 transfer pricing adjustment
tion of Accuracy-Related Penalty on Underpay- penalty
ments” – imposes two specific types of transfer The second transfer pricing penalty (called either
pricing penalties, in addition to other penalties. the “net Section 482 transfer pricing adjust-
The penalty regime is somewhat complex, and ment penalty” or the “net adjustment penalty”
uses a variety of overlapping terms. The penalties described in Section 6662(e)(1)(B)(ii)) turns on
are sometimes formally called “additions to tax”. the amount of the “net section 482 transfer
Subsection 6662(a) provides that if any portion of price adjustment” – in essence the aggregate of
an underpayment of tax required to be shown on all Section 482 adjustments for a given taxable
a tax return is attributable to one or more of the year – defined in Section 6662(e)(3)(A) as “the net
causes described in Section 6662(b), there shall increase in taxable income for the taxable year
be added to the tax an amount equal to 20% of (determined without regard to any amount car-
the portion of the underpayment attributable to ried to such taxable year from another taxable
such cause(s). The “accuracy-related penalties” year) resulting from adjustments under section
arising from the causes listed in Section 6662(b) 482 in the price for any property or services (or
are further named in regulations. Penalties can- for the use of property)”. The net Section 482
not be “stacked” – only one penalty can apply transfer pricing adjustment penalty applies if
to a given underpayment of tax. the net Section 482 transfer price adjustment
exceeds the lesser of USD5 million or 10% of the
The two transfer pricing penalties are part of the taxpayer’s gross receipts. For the corresponding
trio of penalties in the “substantial valuation mis- gross valuation misstatement penalty, replace
statement” penalty under Chapter 1 of the Code USD5 million by USD20 million, and 10% with
(Normal taxes and surtaxes), introduced in Sec- 20%.
tion 6662(b)(3) and described in Section 6662(e)
and in Treasury Regulation Sections 1.6662-5 Defending against transfer pricing penalties
& -6. The 20% penalty is imposed under Sec- Code Section 6664(c)(1) provides in general that
tion 6662(a) if tax underpayments exceed cer- no penalty shall be imposed under Section 6662
tain thresholds (described below). Subsection with respect to any portion of an underpayment
6662(h) doubles the penalty (to 40%, called a of tax if it is shown that there was a reasonable
“gross valuation misstatement penalty”) if the cause for such portion and that the taxpayer
tax underpayments exceed doubled upper, or acted in good faith with respect to such portion
halved lower, thresholds (described below). (the Reasonable Cause & Good Faith Exception).
A substantial body of case law addresses the
The transactional penalty Reasonable Cause & Good Faith Exception, but
The first transfer pricing penalty (the “transac- almost none in the context of transfer pricing
tional penalty” described in Section 6662(e)(1) penalties.
12USA LAW AND PRACTICE
Contributed by: Sanford W. Stark, Thomas V. Linguanti, Rod Donnelly and Saul Mezei
Morgan, Lewis & Bockius LLP
Subparagraph 6662(e)(3)(B) excludes from the 8.2 Taxpayer Obligations under the
penalty threshold determinations, for the net OECD Transfer Pricing Guidelines
Section 482 transfer pricing adjustment penalty, Treasury Regulation Section 1.6038-4 – entitled
any portion of the increase in taxable income “Information returns required of certain United
attributable to any redetermination of price if States persons with respect to such person’s
the taxpayer meets three requirements, which U.S. multinational enterprise group” – provides
depend on whether or not the taxpayer used a that certain US persons that are the ultimate par-
specific transfer pricing method. If the taxpayer ent entity of a US multinational enterprise (US
used a specific transfer pricing method, then MNE) group with annual revenue for the preced-
Section 6662(e)(3)(B)(i) requires that: ing reporting period of USD850 million or more
are required to file Form 8975.
• the taxpayer’s use of the method was reason-
able; Form 8975 and Schedule A are used by filers to
• the taxpayer has documentation on its appli- annually report certain information with respect
cation of the method; and to the filer’s US MNE group on a country-by-
• the taxpayer gives the documentation to the country basis. The filer must list the US MNE
IRS within 30 days of a request. group’s constituent entities, indicating each
entity’s tax jurisdiction (if any), country of organi-
Treasury Regulation Subsection 1.6662-6(d) sation and main business activity, and provide
greatly expands on the documentation needed financial and employee information for each tax
to demonstrate compliance with Section 6662(e) jurisdiction in which the US MNE does business.
(3)(B). Subparagraph 6662(e)(3)(D) overrides The financial information includes revenues,
application of the Reasonable Cause & Good profits, income taxes paid and accrued, stat-
Faith Exception to imposition of a net Section ed capital, accumulated earnings and tangible
482 transfer pricing adjustment penalty unless assets other than cash.
the taxpayer meets the requirements of Section
6662(e)(3)(B) with respect to such portion.
9. ALIGNMENT WITH
The Reasonable Cause & Good Faith Exception OECD TRANSFER PRICING
applies to prevent imposition of the transactional GUIDELINES
penalty. Treasury Regulation Section 1.6662-6(b)
(3) provides, however, that if a taxpayer meets 9.1 Alignment and Differences
the Section 1.6662-6(d) requirements with There is broad alignment of US transfer pricing
respect to a Section 482 allocation, the taxpayer rules under Code Section 482 with the OECD
is deemed to have established reasonable cause Transfer Pricing Guidelines (TPG). In 2007 infor-
and good faith with respect to the item for pen- mal guidance, the IRS signalled its belief that
alty protection purposes. Thus a taxpayer meet- Section 482 and its associated Treasury regula-
ing the requirements of Section 1.6662-6(d) has tions were “wholly consistent with... the OECD
protection against imposition of either transfer Transfer Pricing Guidelines”. Given US involve-
pricing penalty. ment with the creation of the 2017 TPG, that
sentiment is likely stronger now.
Both the Section 482 Treasury regulations and
the TPG have subdivisions broadly dealing
13LAW AND PRACTICE USA
Contributed by: Sanford W. Stark, Thomas V. Linguanti, Rod Donnelly and Saul Mezei
Morgan, Lewis & Bockius LLP
with the arm’s-length standard/principle, trans- ple, but they do, in fact, depart from it in the
fer pricing methods, comparability, intangibles case of cost sharing arrangements, governed
transfers, services and cost sharing arrange- by Treasury Regulation Section 1.482-7. There,
ments/cost contribution arrangements. The TPG whether or not such an arrangement is consid-
go further in certain respects, however, such as ered arm’s length is determined solely by wheth-
by including subdivisions addressing adminis- er the arrangement meets the requirements of
trative approaches to avoiding and resolving the regulation – ie, Section 1.482-7 redefines the
transfer pricing disputes (Chapter IV); documen- arm’s-length standard.
tation, including the three-tiered approach (mas-
ter file, local file and country-by-country report- 9.3 Impact of BEPS
ing) (Chapter V); and transfer pricing aspects of The IRS believes the transfer pricing rules under
business restructurings (Chapter IX). Code Section 482 and its implementing Treasury
regulations are consistent with the OECD TPG
9.2 Arm’s-Length Principle but there is a belief among tax practitioners that
It is challenging to answer the question of differences exist. Any such differences are likely
whether there are any circumstances under to manifest themselves in APA or MAP proceed-
which US transfer pricing rules depart from the ings under US tax treaties with countries whose
arm’s-length principle. US transfer pricing rules transfer pricing rules follow the TPG.
use the concept of the “arm’s-length standard”
rather than the “arm’s-length principle.” The 9.4 Entities Bearing the Risk of Another
standard isn’t found in Code Section 482, but Entity’s Operations
cases addressing the statute and its predeces- In a controlled party situation, one entity can
sor have held the standard to be fundamental in bear the risk of another entity’s operations by
the application of the statute. Section 1.482-1 of guaranteeing the other entity a return, but the
the Treasury regulations provides that, in deter- risk-bearing entity must be appropriately com-
mining the true taxable income of a controlled pensated for the risk bearing. US regulations
taxpayer, “the standard to be applied in every require that contractual risk allocation will be
case is that of a taxpayer dealing at arm’s length respected if the terms are consistent with the
with a controlled taxpayer”. The regulation con- economic substance of the underlying transac-
tinues that “[e]valuation of whether a controlled tions. Comparison of risk bearing is also impor-
transaction produces an arm’s length result is tant in determining the degree of comparability
made pursuant to a method selected under the between controlled and uncontrolled transac-
best method rule described in section 1.482- tions.
1(c)”.
US transfer pricing rules provide a range of 10. RELEVANCE OF
specified methods for determining arm’s-length T H E U N I T E D N AT I O N S
consideration in controlled transactions. While PRACTICAL MANUAL ON
there is no formal hierarchy, the comparable
TRANSFER PRICING
uncontrolled transaction method is paramount
in the sense that pricing determined using such 10.1 Impact of UN Practical Manual on
method is immune from adjustment under the Transfer Pricing
CWI standard. The transfer pricing rules do not The UN Practical Manual on Transfer Pricing
nominally depart from the arm’s-length princi- does not have a significant impact on transfer
14USA LAW AND PRACTICE
Contributed by: Sanford W. Stark, Thomas V. Linguanti, Rod Donnelly and Saul Mezei
Morgan, Lewis & Bockius LLP
pricing practice or enforcement in the United interest rates for bona fide debts denominated
States. While the Manual may be a reference in US dollars where certain other requirements
point for US transfer pricing matters in which are met.
the counterparty country relies on the Manual
more substantially, Code Section 482, its imple- 11.2 Rules on Savings Arising from
menting Treasury regulations, US case law and, Operating in the Jurisdiction
where relevant, the OECD TPG provide the pri- The US transfer pricing rules address location
mary authorities for US transfer pricing practice savings under the regulations that deal with
and enforcement. comparability. The location savings rule is not
specific to savings that arise from operating in
the United States – it applies generally to deter-
11. SAFE HARBOURS OR mine how to allocate location savings between
OTHER UNIQUE RULES a US company and an affiliate operating in a
lower-cost locale. The rule looks to hypothetical
11.1 Transfer Pricing Safe Harbours bargaining power and provides that the affiliate
The United States transfer pricing rules do not in the lower-cost locale should keep a portion of
have safe harbours for transactions deemed the location savings if it is in a position to bargain
immaterial or for taxpayers of a certain size. for a share of the location savings (ie, if there is
But the rules do contain isolated safe harbours a dearth of suitable alternatives in the low-cost
that apply to certain types of transactions. Chief locale or similar low-cost locales).
among them is the services cost method (SCM),
a specified transfer pricing method that permits 11.3 Unique Transfer Pricing Rules or
(but does not require) a taxpayer to charge out Practices
certain “covered services” at cost (ie, with no The US does not have special rules that disallow
mark-up/profit element). marketing expenses by local licensees claiming
local distribution intangibles. Rules that were
Covered services eligible for the SCM include once unique to the US, such as the commen-
specified covered services (ie, those on a list surate with income rule that allows the IRS to
published by the IRS, which includes services make after-the-fact adjustments based on actu-
such as IT, HR and finance) and low-margin ser- al results in the case of an intangibles transfer
vices (those for which the median comparable lasting more than one year, are becoming more
mark-up on total costs is 7% or less). A ser- common as taxing authorities focus on hard-to-
vice is not eligible for the SCM if it is on a list value intangibles.
of excluded activities contained in a regulation
(eg, manufacturing, research and development,
and distribution). In addition, to qualify for the 1 2 . C O - O R D I N AT I O N W I T H
SCM, a taxpayer must reasonably conclude in C U S T O M S V A L U AT I O N
its business judgement that the activity does
not contribute significantly to key competitive 12.1 Co-ordination Requirements
advantages or fundamental risks of success or between Transfer Pricing and Customs
failure. Valuation
The US requires co-ordination between transfer
Another isolated safe harbour relates to loans. pricing and customs valuation. Code Section
The applicable rules provide for safe harbour 1059A and the Treasury regulations thereun-
15LAW AND PRACTICE USA
Contributed by: Sanford W. Stark, Thomas V. Linguanti, Rod Donnelly and Saul Mezei
Morgan, Lewis & Bockius LLP
der look to ensure that, when any property is 13. CONTROVERSY
imported into the United States in a related- PROCESS
party transaction, the importer cannot claim a
higher tax basis in its imported merchandise 13.1 Options and Requirements in
than the value that it claimed for the purpose Transfer Pricing Controversies
of its customs obligations. In other words, the The US transfer pricing controversy process
related-party importer generally cannot claim comprises audit, administrative appeals and
that the value of the property for transfer pricing judicial phases.
purposes under Section 482 is different from the
value of the property for the purpose of paying • Audit – US transfer pricing audits can be long
customs duties in the United States. and intensive, involving hundreds of infor-
mation requests and sometimes including
The Code and Treasury regulations recognise, interviews. In the event a taxpayer does not
however, that there may be differences in value agree with an audit adjustment proposed by
that are appropriate once specific factors are the IRS, the taxpayer has the right to pursue
taken into account. Among those factors are an administrative appeal. The examination
freight charges; insurance charges; the con- team will issue a 30-day letter that gives the
struction, erection, assembly, or technical assis- taxpayer 30 days to contest the adjustment
tance provided with respect to the property after by filing a protest to be considered by the IRS
its importation into the United States; and any Independent Office of Appeals. Alternatively,
other amounts that are not taken into account in a taxpayer can bypass the administrative
determining the customs value are not properly appeal process and head straight to litigation
included in customs value, and are appropriately if it desires.
included in the cost basis or inventory cost for • Administrative appeal – the IRS Independ-
income tax purposes. This last factor (italicised) ent Office of Appeals handles administra-
typically allows a taxpayer to demonstrate how tive appeals of audit adjustments in transfer
its transfer price of the imported good in fact pricing and other cases. Appeals officers will
accords with the arm’s-length standard required consider the examination file, the taxpayer’s
under Section 482 and why any difference protest and the IRS examination team’s
between that arm’s-length value and the cus- response to it, and will conduct one or more
toms value is in accord with its obligations under hearings with the aim of settling the dispute.
Section 1059A. This is an area, though, that con- Appeals officers are instructed to account
tinues to confound not only taxpayers but also for the probable results in litigation and settle
the taxing and customs authorities, which are cases based on the “hazards of litigation”.
not as co-ordinated as they would prefer. These A taxpayer unable to resolve its dispute on
tax versus customs obligations therefore must audit or before the IRS Independent Office of
be considered carefully. Appeals can proceed to court.
• Judicial process (trial and appeal) – a taxpay-
er can litigate a transfer pricing case in the
US Tax Court, a federal district court or the
Court of Federal Claims. The US Tax Court is
the only prepayment forum (ie, the only court
in which the taxpayer can litigate without first
paying the disputed tax and suing the United
16USA LAW AND PRACTICE
Contributed by: Sanford W. Stark, Thomas V. Linguanti, Rod Donnelly and Saul Mezei
Morgan, Lewis & Bockius LLP
States for a refund). The federal district courts isfaction of a pricing method agreed between
and the Court of Federal Claims hear refund the taxpayer and the IRS.
suits. • Amazon.com, Inc. v Commissioner (2017
(U.S. Tax Court); 2019 (9th Circuit)) – the Tax
Taxpayers and the government can appeal trial Court ruled that the IRS’s application of the
court decisions to the federal appellate courts. income method to price a cost sharing buy-in
US Tax Court and federal district court decisions was arbitrary, capricious or unreasonable.
are appealable to the 12 regional circuit courts of The Tax Court agreed with the taxpayer that
appeals. Court of Federal Claims decisions are the IRS had wrongly included non-compen-
appealable to the US Court of Appeals for the sable goodwill and going concern value in its
Federal Circuit. Appellate court decisions can be adjustment. The US Court of Appeals for the
appealed to the US Supreme Court, which has Ninth Circuit rejected the IRS’s argument that
discretion as to whether to entertain the appeal goodwill and going concern value were com-
(and which, in fact, entertains very few appeals). pensable under the then existing regulations
(which have since been amended).
• Altera Corp. v Commissioner (2015 (US Tax
14. JUDICIAL PRECEDENT Court); 2018 (9th Circuit)) – the Tax Court
invalidated a regulation that required par-
14.1 Judicial Precedent on Transfer ties to a cost-sharing agreement to share
Pricing the costs of stock-based compensation. A
Judicial precedent on transfer pricing in the divided US Court of Appeals for the Ninth
US is fairly well developed. But transfer pricing Circuit reversed and upheld the regulation.
cases are facts-and-circumstances dependent, • Bausch and Lomb, Inc. v Commissioner,
which renders it difficult to rely too heavily on (1989 (US Tax Court); 1991 (2nd Circuit)) – the
precedent from one case to the next. Tax Court rejected the IRS’s attempt to col-
lapse a license of technology and subsequent
14.2 Significant Court Rulings sale of contact lenses and treat a licensee
There have been a number of important transfer as a contract manufacturer. The US Court of
pricing court cases in the United States. Some Appeals for the Second Circuit affirmed.
of them are as follows. • Hospital Corporation of America v Com-
missioner (1983 (US Tax Court)) – the Tax
• The Coca-Cola Co. v Commissioner (2020 Court held that a business opportunity is not
(US Tax Court) – still active) – the Tax Court property and respected a transaction in which
ruled that the IRS was not arbitrary and a foreign affiliate entered into a contract that
capricious in applying the comparable profits the US parent could have entered into itself.
method with return on assets profit level • B. Forman Co. v Commissioner (1970 (US
indicator to allocate income from six foreign Tax Court); 2nd Circuit (1972)) – the Tax Court
affiliates to the US parent. In so doing, the required technical control for the transfer pric-
Tax Court did not allow the taxpayer to argue ing rules to apply. The US Court of Appeals
based on the substance of the controlled for the Second Circuit reversed and endorsed
transactions. The Tax Court allowed the tax- a flexible “acting in concert” test.
payer to offset against its royalty obligations
amounts paid historically as dividends in sat-
17LAW AND PRACTICE USA
Contributed by: Sanford W. Stark, Thomas V. Linguanti, Rod Donnelly and Saul Mezei
Morgan, Lewis & Bockius LLP
1 5 . F O R E I G N PAY M E N T The regulation provides another difficult-to-sat-
RESTRICTIONS isfy avenue for compelling the IRS to respect a
foreign legal restriction – if a taxpayer can dem-
15.1 Restrictions on Outbound onstrate that the foreign legal restriction affected
Payments Relating to Uncontrolled an uncontrolled taxpayer under comparable cir-
Transactions cumstances for a comparable period of time.
With the potential exception of targeted eco-
nomic sanctions programmes (ie, embargoes),
the US does not restrict outbound payments 1 6 . T R A N S PA R E N C Y A N D
relating to uncontrolled transactions. CONFIDENTIALITY
15.2 Restrictions on Outbound 16.1 Publication of Information on APAs
Payments Relating to Controlled or Transfer Pricing Audit Outcomes
Transactions Pursuant to the Ticket to Work and Work Incen-
The US does not restrict outbound payments tives Improvement Act of 1999, Congress
relating to controlled transactions. But the US required the IRS to publish an annual report on
recently instituted a base erosion and anti-abuse its APA programme. The first report covered the
tax (BEAT) targeting outbound payments in con- period from the APA programme’s inception in
trolled transactions that strip earnings out of the 1991 through 1999, and the IRS has published
US through deductible payments. annual reports every year since. The annual
report provides substantial data and other infor-
15.3 Effects of Other Countries’ Legal mation on APAs during the covered year, includ-
Restrictions ing:
The US has a regulation regarding the effects of
other countries’ legal restrictions. That regula- • the number of APA applications filed in total
tion is currently being challenged in court. The and, for bilateral APAs, by foreign country;
regulation provides that the IRS will respect a • the number of APAs executed in total and, for
foreign legal restriction only if certain require- bilateral APAs, by foreign country;
ments are met. Chief among those requirements • the number of APA applications pending in
is that the foreign legal restriction must be pub- total and, for bilateral APAs, by foreign coun-
licly promulgated and generally applicable to try;
uncontrolled taxpayers in similar circumstances. • the number of APAs revoked or cancelled,
The regulation also requires: and APA applications withdrawn;
• the numbers and percentages of APAs exe-
• that the taxpayer must exhaust all remedies cuted by industry and certain sub-industries;
provided by foreign law for obtaining a • the nature of the relationships between the
waiver; controlled parties in executed APAs;
• that the foreign legal restriction must express- • the types of covered transactions in executed
ly prevent payment of part or all of the arm’s- APAs;
length amount; and • the types of tested parties in executed APAs;
• that the related parties must not have circum- • the transfer pricing methods used in executed
scribed or violated the foreign legal restriction APAs;
in any way (eg, by payment of a dividend). • the sources of comparables, comparable
selection criteria and nature of adjustments to
18USA LAW AND PRACTICE
Contributed by: Sanford W. Stark, Thomas V. Linguanti, Rod Donnelly and Saul Mezei
Morgan, Lewis & Bockius LLP
comparables or tested party data in executed 17. COVID-19
APAs;
• the use of ranges, goals and adjustment 17.1 Impact of COVID-19 on Transfer
mechanisms in executed APAs; Pricing
• the use of critical assumptions in executed It is generally too soon to tell how COVID-19
APAs; may affect the transfer pricing landscape in the
• the term lengths of executed APAs; United States. It is certainly possible that COV-
• the amount of time taken to complete new ID-19-related economic impacts may affect the
and renewal APAs; and value of intangibles, tangible goods, services
• post-execution efforts to ensure compliance transactions or any other market transactions
with an APA and ensure the adequacy of that provide comparables for transfer pricing
required annual documentation under an APA. analyses. The impacts of COVID-19 should
become more apparent in the years ahead.
There are no similar reports on IRS transfer pric-
ing audit outcomes. 17.2 Government Response
As of yet, the IRS has not relieved payment obli-
16.2 Use of “Secret Comparables” gations or otherwise relaxed standards.
The United States is not known to rely on secret
comparables for transfer pricing enforcement. 17.3 Progress of Audits
Typically, at the end of a transfer pricing audit, IRS transfer pricing audits have continued during
if the IRS is going to assert a transfer pricing COVID-19. While some transfer pricing audits
adjustment, then the IRS will provide the taxpay- have slowed somewhat, in general existing trans-
er with a written report in which it discloses any fer pricing audits have proceeded apace, certain
comparables on which it is relying to justify its transfer pricing audits have concluded, and new
adjustment. Similarly, in litigation, the IRS would transfer pricing audits have commenced.
provide one or more reports detailing the IRS’s
transfer pricing analyses and the bases for them.
In the APA context, the annual report required by
Congress (see 16.1 Publication of Information
on APAs or Transfer Pricing Audit Outcomes)
specifies the sources of comparable data on
which APMA relies, with the list generally com-
prised of publicly available databases.
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