Clark Armitage Weighs in on Transfer Pricing in 2025 in Tax Notes

Following a wave of global transfer pricing developments, the United States, Brazil, and Germany face challenges in 2025 as multilateral efforts to simplify the tax system have made compliance more complicated in practice.

. . .

“The most important transfer pricing litigation trends in 2025 are twofold,” J. Clark Armitage of the Washington office of Caplin & Drysdale told Tax Notes. “One is an increased use of the economic substance doctrine by the IRS,” he said, pointing to Perrigo Co. v. United States, No. 1:17-cv-00737. “The Perrigo case was the first one in the transfer pricing arena, but we’ll be seeing more of that, I believe, in the near future,” he said. A decision by the U.S. District Court for the Western District of Michigan is pending.

Loan transactions are also on the IRS's radar, Armitage said — particularly parent guarantees and intercompany debt and their alleged noncompliance with the arm’s-length principle. “I expect a number of cases will be docketed in that area in the near future,” he said.

In 2023 the IRS issued a general legal advice memorandum (GLAM) on implicit support for intercompany loans (AM 2023-008). “It summarizes the IRS approach to these types of adjustments although taxpayers believe many adjustments are not following the GLAM and are simply putting the subsidiary on the same credit rating as the parent, which typically results in a lower interest rate that is not arm’s length,” Armitage said. The topic of implicit support has been on the IRS priority guidance plans for the last four cycles without draft regulations being issued. On January 30 Brad McCormack of the IRS Office of Associate Chief Counsel (International) said the workload caused by the OECD pillar projects has prevented the IRS from tackling these regulatory issues.

Armitage also observed that the IRS advance pricing and mutual agreement program appears to be following through on indications it would accept a lower number of advance pricing agreements, at least in the unilateral area. “So the APA inventory is most likely to fall in the next years, or so,” Armitage said. “It appears they only want to agree to an APA in the future if it covers an area where there is some real controversy or audit risk for the taxpayer.”

Armitage does not think that the expected extension of the 2017 Tax Cuts and Jobs Act will lead to any new legislative action in section 482. In 2017 the realistic alternatives and aggregation principles were added to section 482, and the definition of intellectual property was expanded in section 367(d). “Those were the IRS’s big asks, and they got them, so I think they are using those tools right now to address what they perceive to be transfer pricing abuses,” Armitage said. “The realistic alternatives and aggregation principles issues were already in the regs, and they wanted to have them cemented as statutory backup.” New regulations implementing the exact language of the transfer pricing-related rules in the TCJA are also in the 2024–2025 priority guidance plan. “The IRS is intending to issue regs on these topics and is likely to do so soon,” Armitage said.

For the full article, please visit Tax Notes’ website (subscription required).