Law360 Quotes Elizabeth Stevens on Major International Tax Decisions of 2022
This year, courts weighed in on key transfer pricing topics, including a decision that confirmed the application of contract law to advance pricing agreements and another ruling that followed a unique path in finding an arm's-length division of intercompany profits.
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If the best transfer pricing method gets it right, then different ones that are properly applied using reliable data should arrive at roughly the same outcome, according to Elizabeth Stevens, a Member of Caplin & Drysdale. As a strategic matter, this case may encourage litigants to consider more seriously a convergence of methods when presenting their transfer pricing reports, she said.
"Because that may be more persuasive than just saying, 'My way or the highway,'" Stevens said.
While there are risks in presenting different methods in litigation, companies may rely more on convergence analysis in an audit defense context, according to Stevens. It's the outcome — not necessarily the process — that matters, she said.
"If you're trying to get to an arm's-length result, and you can show that multiple paths lead to basically the same spot, that reinforces the idea that it's arm's length," she said.
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As Stevens sees it, while the ruling is likely to comfort companies in confirming that contract law applies to APAs, there's a question of whether the agency will change its revenue procedures to lower the threshold to revoke or cancel these agreements. However, rather than make extreme changes that would turn APAs into one-way agreements, the IRS may try to achieve a middle ground that wouldn't depress demand, she said.
"The whole point is tax certainty," Stevens said of the APA program. "And if the government can revoke the APA at its discretion, then that's not a lot of certainty."
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According to Stevens, it's understandable why the Supreme Court didn't take up the case, in part because of the arcane nature of Subpart F and the lack of a circuit split. However, she noted the facts as presented in the opinion may make the case an outlier in terms of whether the court felt it needed to look closely at the regulations.
This case isn't the herald of future court decisions that look only at statutes, she said, noting that parties will also continue to rely on regulations and "the IRS can hardly disregard its own regulations."
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