The Internal Revenue Service’s (“IRS’s”) Large Business and International (“LB&I”) Division is focused on putting a stop to multinational corporations that use non-arm’s length transfer pricing to lower their tax bill by illegally shifting profits to tax jurisdictions with relatively lower tax rates. Speaking at a webinar on March 7, Jennifer Best, LB&I Deputy Commissioner, had no qualms in sharing that the IRS will use funding from the Inflation Reduction Act to fuel this enforcement priority. Best shared that the IRS is hiring “new economists, tax law specialists and revenue agents to work transfer pricing issues and increase transfer pricing coverage,” while also looking to “do more audit work, which involves a bilateral and multilateral approach to coordinate with subject matter experts and data scientists equipped with advanced analytical software.” Together, the efforts are intended to streamline workloads and issue selection by “using data and the tools to identify compliant taxpayers as well as noncompliant taxpayers” so the LB&I can focus “energies and resources to areas and filings presenting the highest risk of noncompliance.”[1]
Best’s comments reinforce the bold remarks made at a Tax Executives Institute Seminar in late 2022 by a member of LB&I’s transfer pricing practice, Brad Anwyll, when he lamented that the IRS is “…not doing enough of asserting penalties where the documentation reports just are not sufficient and not reasonable.” Adding that on a go-forward basis “…the plan is to get a closer look at whether penalties are appropriate.” Namely, “we’re really going to look at the reasonableness of the selection of the method and the reasonableness of the application in deciding whether to assert a penalty.”[2]
With increased funding, staffing and technologies, taxpayers should expect to see a rise in transfer pricing audits, penalties and assessments, as well as increased scrutiny about the standards that satisfy “sufficient documentation,” including the quality of transfer pricing analyses and method selections. Now, more than ever, it is imperative that multinational corporations assess and develop strategies to mitigate risk by ensuring there is sufficient transfer pricing in place for all value transfers between controlled parties, as well as confirming the arm’s length nature of their existing transfer pricing policies.
So, what does all this mean for you and your multinational corporation?
- If transfer pricing has been on the back burner for you and your multinational corporation, it is time to consider a deep-dive analysis to (1) identify and delineate all intercompany transactions (i.e., value transfers) between related parties, (2) confirm existing transfer pricing policies are arm’s length and/or identify adjustments needed to satisfy the arm’s length standard; and, (3) develop arm’s length pricing policies for transactions that have never been priced.
- If your transfer pricing study is old and out of date, it is time to consider a refresh to confirm all pricing strategies continue to produce arm’s length results.
- If you are unsure of your risk profile, it is imperative to perform risk assessments to understand and evaluate potential transfer pricing risk from both a U.S. perspective, as well as from a foreign perspective.
- In order to protect your company from penalties and show good faith as a taxpayer, preparing contemporaneous transfer pricing documentation will provide the first and best line of defense in a tax audit.
[1] Shaw, Tim (2023). Transfer Pricing Enforcement, Advance Agreement Changes Coming, IRS Official Says. Checkpoint Learning, Thompson Reuters, Week of March 13, Articles.
[2] Strocko, Kiara M. (2022). IRS May Assert More Penalties for Transfer Pricing Documentation. Tax Notes International, Volume 107, 1575.
We’re Here to Help
Bennett Thrasher’s transfer pricing practice is well positioned to assist taxpayers in assessing transfer pricing risk and developing strategies to mitigate risk, which may include the preparation of transfer pricing documentation. To learn more about how our professionals can support your transfer pricing needs, please contact Ben Miller or Sarah Norwood by calling 770.396.2200.
