Transfer Pricing (TP) remains a critical area in US tax law, evolving continuously to meet global and domestic economic challenges. The USA Transfer Pricing Guide explores the multifaceted aspects of transfer pricing in the USA, offering insights into the legal framework, dispute resolution, significant cases, and current developments. It aims to provide a thorough understanding of TP principles and methodologies, compliance requirements, and the impact of Base Erosion and Profit Shifting (BEPS) on US policies. The guide also underscores the importance of education and training in TP, highlighting the resources available through the I/I/T/F Academy of Tax Law.

General Overview of Transfer Pricing in the US

The US TP regime is comprehensive and arguably one of the toughest globally[14]. It is governed by a single statute in the Internal Revenue Code and a large body of implementing regulations[8]. The Organisation for Economic Cooperation and Development (OECD) TP guidelines are not incorporated into US TP regulations, but the IRS maintains that US TP regulations are consistent with the OECD guidelines[17].

Dispute Resolution and TP Controversies in the US

TP disputes often involve large tax adjustments, making them difficult to resolve[9]. The IRS has signaled an increased assertion of the Economic Substance Doctrine in TP cases, indicating a more aggressive approach to TP controversies[13]. The Advance Pricing and Mutual Agreement program (APMA) within the IRS plays a significant role in dispute resolution[5].

5 Important Transfer Pricing Cases in the US

• Coca-Cola Co. v. Commissioner (2020):

  This landmark case involved a dispute over the allocation of income between Coca-Cola and its foreign subsidiaries. The IRS argued that Coca-Cola’s transfer pricing did not comply with the arm’s length standard, leading to a significant underreporting of taxable income in the U.S. The Tax Court sided with the IRS, resulting in Coca-Cola owing a substantial amount in back taxes.

• Amazon.com Inc. v. Commissioner (2017):

  A pivotal case concerning cost-sharing arrangements and the transfer of intangible assets. The IRS challenged Amazon’s transfer pricing methodologies related to its European subsidiaries. The Tax Court ruled in favor of Amazon, setting a precedent for how intangible assets are valued in transfer pricing.

• Medtronic Inc. v. Commissioner (2018):

  This case centered on the royalties paid by a Medtronic subsidiary in Puerto Rico to its U.S. parent for the use of patented technology. The Tax Court initially sided with Medtronic, but the decision was later vacated and remanded by the Appeals Court, emphasizing the importance of comparable uncontrolled transactions in setting transfer prices.

• Altera Corporation v. Commissioner (2019):

  A significant case involving cost-sharing arrangements and stock-based compensation. The Ninth Circuit Court of Appeals reversed a previous Tax Court decision, upholding a Treasury regulation that requires the inclusion of stock-based compensation in the cost-sharing calculation. This decision has had broad implications for companies with similar arrangements.

• Facebook Inc. v. Internal Revenue Service (ongoing):

  This ongoing case involves the transfer of intangible assets by Facebook to its Irish subsidiary. The IRS alleges that Facebook undervalued these assets, leading to a significant understatement of taxable income. The outcome of this case is anticipated to have major implications for digital companies and the valuation of intangible assets in transfer pricing.

These cases highlight the complexity and evolving nature of transfer pricing in the U.S., underscoring the importance for companies to maintain robust compliance practices and documentation.

Latest TP Developments in the US

The IRS has recently indicated a more aggressive approach to TP controversies, including more frequent application of the Economic Substance Doctrine[13]. Additionally, the IRS has lifted a requirement for “executive-level” approval before applying this doctrine and related penalties[13].

Arms Length Principle

The arm’s length principle is a cornerstone of TP regulations. It seeks to ensure that related parties agree on a price as if they were unrelated parties dealing at arm’s length[11].

Transfer Pricing Methods

US legislation provides for various TP methods, including Comparable Uncontrolled Price (CUP), Resale Price, Cost Plus, Transactional Net Margin Method (TNMM), and Profit Split[7].

Compliance

Compliance with US TP rules is crucial for multinational enterprises. The IRS provides comprehensive documentation best practices to aid in compliance[4].

Comparability Analysis

Comparability analysis is a key aspect of TP, used to determine arm’s length pricing in related-party transactions[11].

Intangibles

Intangibles play a significant role in TP, particularly in the context of multinational corporations. The IRS has comprehensive regulations addressing the treatment of intangibles in TP.

Permanent Establishments

Permanent establishments can have significant TP implications. The IRS considers cases arising under the permanent establishment articles of US tax treaties[5].

Compliance and The Importance of Documentation

Comprehensive documentation is crucial for TP compliance. The IRS provides best practices for TP documentation[4].

Base Erosion and Profit Shifting (BEPS) and the US

BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules. The US has been actively involved in the OECD’s work on BEPS.

TP Policy Development

The US has been at the forefront of TP policy development, with comprehensive regulations and a proactive approach to TP controversies[13].

Why should you engage with Prof Dr Daniel N Erasmus and his team?

The I/I/T/F Academy of Tax Law, led by Dr. Erasmus, plays a significant role in TP education. Its postgraduate programs in TP provide invaluable knowledge and skills, equipping professionals to navigate complex TP landscapes.

The USA Transfer Pricing Guide offers a quick overview of US TP. For further guidance, particularly in TP dispute resolution and effective policy management, Dr. Erasmus and the TRM team are invaluable resources. Their expertise is further showcased in Dr. Erasmus’s book, “Conducting a TP Trial”, available at https://tptrial.iitfconnect.com/. For expert assistance in managing TP policies and navigating disputes, contact Dr. Erasmus and the TRM team.

For further assistance with TP, don’t hesitate to get in touch with Dr Erasmus and the TRM team.