What is different about transfer pricing (IRC Section 482) in 2018 versus prior years? The primary differences are the following:

  1. The advent of the 2017 Tax Act is expected to place additional IRS scrutiny on large allocations to foreign corporations from U.S. subsidiaries.
  2. This potential audit issue is exacerbated by the focus on overseas income and repatriation of U.S. taxes.
  3. More companies have international operations, which can naturally lead to storing profits with the overseas parent.
  4. 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.

  1. 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.
  1. 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
  1. Arm's-Length Range – a statistical range of all comparable uncontrolled transactions brought to a similar level of comparability and reliability.