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At the 12th Annual Pacific Rim Tax Conference on 18 May 2023, IRS officials highlighted three transfer pricing developments. First, the IRS is bolstering transfer pricing enforcement through increased staff and data analytics. Second, the IRS will accept unspecified methods when they lead to a reliable result. Third, the IRS supports Amount B under Pillar One of the two-pillar plan of the Organisation for Economic Cooperation and Development (OECD). The officials also confirmed that the Advance Pricing and Mutual Agreement Program (APMA) will still accept complicated cases in its Advance Pricing Agreement (APA) program.
Bolstering transfer pricing focus with new funding1
Jennifer Best, the Acting Deputy Commissioner at the IRS's Large Business and International (LB&I) division, stated that the agency is planning to increase its focus on transfer pricing by recruiting and training specialized staff and enhancing data analytics. Best added that transfer pricing aligns with the IRS's goals of strengthening enforcement on large corporations, as outlined in its strategic operating plan (pdf), released on 5 April 2023. Best expressed the agency's intention to expand its transfer pricing work in the future. This initiative is part of the $80 billion in additional funding granted to the IRS by Congress last year through the Inflation Reduction Act (see EY Tax Alert, US IRS releases general plan for spending $80 million over the next 10 years, dated 13 April 2023).
According to Best, the IRS aims to enhance its ability to identify transfer pricing noncompliance among taxpayers with improved information technology tools and "external assistance." She acknowledged, however, that this task is challenging due to the requirement for in-depth analysis of tax returns.
The success of the IRS's efforts to enhance tax certainty also relies on its ability to hire, train and retain expert staff to handle these programs effectively, Best said. The IRS's strategic operating plan emphasizes the expansion of tax certainty and issue resolution programs, enabling taxpayers to address potential compliance issues proactively through expanded pre-filing and tax certainty initiatives. Best said that the IRS is evaluating existing programs such as the Compliance Assurance Process, APAs and the pre-filing agreement program to identify areas for improvement and expansion. Some of these programs had previously been limited due to resource constraints, she added.
Accepting unspecified methods that produce reliable results2
During the conference, Best was asked about the transfer pricing functions of LB&I and its openness to unspecified transfer pricing methods. According to a conference participant, there has been considerable discussion among tax commentators about unspecified methods since the Tax Court's opinion in Medtronic Inc. v. Commissioner, T.C. Memo 2022-84.
Best stated that a specified method is the preferred choice in most cases. She acknowledged, however, that using an unspecified method can be effective if it aligns with regulations and produces the most reliable result.
Supporting the OECD's Amount B3
Best also reaffirmed the IRS's support for the Amount B tax simplification rules under Pillar One of the OECD's two-pillar plan. She described the proposed Amount B rules as a valuable tool for developing countries with limited expertise and experience in transfer pricing, as well as limited access to relevant data for conducting thorough comparability searches.
David Bradbury, Deputy Director of the OECD's Centre for Tax Policy and Administration, discussed the Amount A profit reallocation rules, acknowledging that unresolved issues remain despite progress on the rules' technical aspects. Bradbury said three milestones need to be achieved: concluding negotiations with a finalized text, which is expected to occur by July; executing a multilateral convention, the timing of which will depend on domestic consultation, legislative procedures and administrative processes; and ratifying Amount A.
Bradbury noted that "the fate of Amount A lies in the hands of the negotiating jurisdictions." Regardless of the outcome, he said, the fact that numerous countries have embraced principles that expand the international tax framework into previously uncharted territories is a significant development, making it unlikely that the world will return to its previous state.
APMA still accepting complicated cases4
According to Nicole Welch, acting Director of the IRS Treaty & Transfer Pricing Operations Practice Area, who spoke at the same conference, the IRS does not want or intend to avoid dealing with complex transactions in the APA program. On the contrary, the IRS is committed to handling complex transactions through the APMA, she said.
In an April memo (pdf), the IRS outlined a more discerning approach to APAs, which would focus resources on cases with higher chances of success based on criteria such as transaction complexity and past experiences with other governments. According to the memo, APMA will now engage in a rigorous two-step review of APA requests — the first at the prefiling stage and the second after an APA submission is filed. At each step, APMA may decline a taxpayer's APA request and recommend that the taxpayer apply to the International Compliance Assurance Program (ICAP) or indicate that the issues are better suited to be handled in an audit — joint or domestic. The intention is to optimize efficiency and concentrate efforts (see EY Tax Alert, US IRS interim guidance on review and acceptance of Advance Pricing Agreement submissions fundamentally changes early stages of the process, dated 4 May 2023).
According to Welch, the guidance does not imply that all complex transactions are suitable for joint audits, although joint audits may sometimes offer a faster resolution depending on the treaty partner. The interim guidance will be incorporated into the Internal Revenue Manual after a two-year monitoring period, during which adjustments can be made based on outcomes. Welch said she hopes that people will embrace this new process and appreciate its benefits.
Implications
In light of these recent statements by IRS officials, it is important for taxpayers to recognize that the IRS's policies and procedures on transfer pricing are changing rapidly and focusing on more effective enforcement efforts. The transfer pricing landscape is evolving not only in the wake of the IRS strategic operating plan but also the OECD's Amount B work. Taxpayers must be diligent in their transfer pricing practices, selection of methodology and substantiation of their practices in intercompany agreements and documentation.
Contact Information
For additional information concerning this Alert, please contact:
National Tax Department, International Tax and Transaction Services, Transfer Pricing
- Ryan J. Kelly, Americas ITTS Tax Controversy Leader
- Hiro Furuya
- Ameet Kapoor
- Carlos M. Mallo
- Marla McClure
- Donna McComber
- Mike McDonald
- Tom Ralph
- Craig Sharon
- Kent Stackhouse
- Thomas A. Vidano
- Heather Gorman
- Giulia Di Stefano
- Carolina Figueroa
- Mitch Gibson
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
