Alert

The IRS took significant steps to enhance compliance with transfer pricing regulations, gaining taxpayer attention. As a result, businesses must proactively evaluate their transfer pricing policies, documentation, and agreements to ensure alignment with regulatory expectations. IRS efforts include:

• Sending compliance alerts to foreign-owned distribution entities reporting low profits or losses
• Issuing guidance on implicit financial support in intercompany loans through a generic legal advice memorandum (GLAM)
• Adopting a stricter approach to Internal Revenue Code (IRC) Section 6662 penalties in transfer pricing disputes

Although these measures reflect a stricter enforcement environment, the IRS has also shown flexibility by encouraging taxpayers to self-correct their transfer pricing practices.

Additionally, the IRS continues to promote alternative dispute resolution mechanisms for resolving transfer pricing conflicts.

Compliance Alerts on Foreign-Owned Distributors

As part of its large foreign-owned corporations transfer pricing initiative, the IRS issued 180 compliance alerts between November 2023 and January 2024, targeting US subsidiaries of foreign corporations with persistent losses or marginal profits.

The agency's communication emphasized that distributors with limited functions, assets, and risks typically should not operate at a loss. Although these alerts are not audits, they encourage companies to reassess their transfer pricing policies and address any misalignments to avoid potential examinations.

Guidance on Implicit Financial Support in Intercompany Loans

In December 2023, the IRS issued AM 2023-008, emphasizing the impact of implicit financial support within corporate groups on intercompany loan interest rates.

According to the guidance, arm's length interest rates should mirror those a third-party lender would offer, considering not only the standalone creditworthiness of the borrower but also the overall credit standing of the corporate group. This approach requires taxpayers to evaluate the influence of group affiliation on lending terms, ensuring compliance with IRC Section 482 standards.

This guidance underscores the need for multinational enterprises (MNEs) to revisit their intercompany financing arrangements, ensuring that interest rates align with the arm’s length standard while considering group membership effects. Failure to incorporate these considerations may result in increased scrutiny, adjustments, or penalties during an IRS examination.

Heightened IRC Section 6662 Penalties for Transfer Pricing Adjustments

The IRS increased its focus on asserting penalties under IRC Section 6662 for inadequate or incomplete transfer pricing documentation. This shift aligns with a 2018 Advisory Council recommendation to ensure penalties better reflect the legislative intent of the statute. This includes imposing penalties even when documentation exists but is deemed insufficient.

Concerns among taxpayers have risen as the IRS's evaluation extends beyond documentation quality to whether chosen methods align with IRS expectations. High-profile disputes involving companies like Amgen and Microsoft underline the stakes for taxpayers.

Taxpayers are advised to invest in robust transfer pricing documentation and methodologies to mitigate the risk of substantial penalties, which can reach 40% for significant adjustments.

Commitment to Alternative Dispute Resolution

Despite its stricter enforcement, the IRS continues to support collaborative resolution methods, such as advance pricing agreements (APAs) and mutual agreement procedures (MAPs). Additionally, the IRS remains a strong advocate for the International Compliance Assurance Program (ICAP) to streamline dispute resolution globally.

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