Financier Worldwide Annual Review: Transfer Pricing 2020 – United States
Excerpt taken from the report.
Q. What do you consider to be the most significant transfer pricing changes or developments to have taken place in the US over the past 12 months or so?
[ARMITAGE and STEVENS]: The most important US transfer pricing development this year is the effective non-participation of the US in the Organisation for Economic Co-operation and Development’s (OECD’s) Pillar 1 discussions on the taxation of the digital economy. A project that seemed to be on a fast track toward consensus, and would have proposed globally consistent rules allowing taxation in the absence of an in-country physical presence as a means of deterring heterogeneous unilateral measures primarily affecting US companies, was somewhat surprisingly thrown off track. For the present, the US seems to be disinclined to cooperate meaningfully on this issue. Another important development is the Internal Revenue Service’s (IRS’s) win in the Altera decision in California’s 9th Circuit Court of Appeals. The technical issue is whether stock-based compensation earned by research and development (R&D) employees must be shared by related foreign participants who benefit from intellectual property (IP) developed by those employees. The 9th Circuit ruled that it must, even though the IRS was unable to present information showing that unrelated parties share such costs. The important implication is that transfer pricing rules may be based on assumptions about what related parties might do, even in the absence of evidence of actual behaviour.
Q. In your opinion, do companies pay enough attention to the challenges and complexities of maintaining compliant transfer pricing policies?
[ARMITAGE and STEVENS]: No company has an unlimited budget to manage transfer pricing risk. It is important to focus efforts on high risk transactions and transactions that cover large dollar volumes. Our experience is that taxpayers do focus on the right things. It is likely that the revenue demands of countries will grow in the pandemic and post-pandemic era. This will lead to more controversies and could force companies to spend more resources on defending transfer pricing policies. But those expanded governmental efforts likely will be focused on big dollar issues, which taxpayers typically are prepared to address.
Q. To what extent have the tax authorities in the US placed greater importance on the issue of transfer pricing in recent years, and increased their monitoring and enforcement activities?
[ARMITAGE and STEVENS]: The IRS recently gave its new transfer pricing practice (TPP) issue control over transfer pricing audits. This is novel because the TPP is not part of the local audit team, but instead is a national office function with independent decision making and timelines. Among the goals of the change was increasing the number and intensity of transfer pricing audits, which sometimes were viewed by local audit teams as preventing the timely completion of audits due to the length and depth of the required fact development. Our experience has been that the TPP’s presence has increased the number and depth of transfer pricing audits, but that its personnel have generally done a good job of coordinating with the local audit team to avoid unduly extending the length of the audit process. This helpful outcome likely reflects that TPP employees are experienced transfer pricing professionals – bringing technical specialists to the transfer pricing audit was another goal for the TPP – as well as good cooperation among the IRS functions.
Elizabeth Stevens assisted in writing the review.