What is different about transfer pricing (IRC Section 482) in 2018 versus prior years? The primary differences are the following:
- The advent of the 2017 Tax Act is expected to place additional IRS scrutiny on large allocations to foreign corporations from U.S. subsidiaries.
- This potential audit issue is exacerbated by the focus on overseas income and repatriation of U.S. taxes.
- More companies have international operations, which can naturally lead to storing profits with the overseas parent.
- The IRS considers this code section ripe for audit.
Any intercompany pricing method – whether for transfers of tangible or IP assets, or for loans or services – must be applied to comply with the following.
- Best Method Rule – taxpayer determines the arm's-length result of controlled transactions based upon: (1) the comparability of controlled and uncontrolled transactions, and (2) the quality of the data and assumptions.
- Comparability Analysis – comparability of uncontrolled taxpayer transactions based upon:
- functions performed
- significant contractual terms
- risks affecting price or profit
- economic conditions affecting price or profit
- property or services transferred
- Arm's-Length Range – a statistical range of all comparable uncontrolled transactions brought to a similar level of comparability and reliability.