Clark Armitage Weighs in on Periodic Adjustment Rule in Bloomberg Law

Business groups are taking their shot at transfer pricing rules they call invalid and bad for business, looking to the Trump administration’s deregulation drive for relief.

Many objections to the rules have been, or will be, hashed out in court, but President Donald Trump’s rare invitation to submit lists of items for removal or change may be an expedited way for taxpayers to get what they want.

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The invitation is a “feature of the Administration’s approach to managing the administrative state and suggests Treasury will be receptive to changes taxpayers may suggest or at least provide a full and fair hearing,” said Caplin & Drysdale international tax attorney Clark Armitage.

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The National Foreign Trade Council said the rule causes too much tax uncertainty and controversy and discourages investors from joint ventures.

It’s an area ripe for challenge, Armitage said.

“The IRS promulgated regulations asserting that it has authority to adjust a lump sum price paid for intangible property in later years when the year of transfer is now closed to audit,” he said. “Nothing in Section 482 allows for this.”

Armitage said the IRS put out a generic legal advice memo, or GLAM, saying that it has the authority to make periodic adjustments based on actual profits “even if the original transaction was priced at arm’s length and to make adjustments in out years that recoup value relating to years now closed to IRS audit.”

The result is a “heads I win, tails you lose” situation, he said, where the IRS can stick taxpayers with the highest tax bill whether their forecast was too high or too low.

Court cases are coming, and mutual agreement procedures—dispute resolution processes—with other countries could pose more challenges to the IRS’s position on this, Armitage said.

“I understand that litigation is on the near horizon. It will also be interesting to see how the IRS policies could be implemented through MAP,” he said. “Foreign countries likely will not be receptive to this heads IRS wins, tails the foreign country loses approach to transfer pricing.”

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