Financier Worldwide Indepth Feature: Transfer Pricing 2024 

Clark Armitage offers insights in Indepth Feature: Transfer Pricing for the May 2024 issue of Financier Worldwide Magazine.

Q: What do you consider to be the most significant transfer pricing changes or developments to have taken place in your country of focus over the past 12 months or so?

Armitage: The biggest development during the past 12 months was the 3M decision, in which the US Tax Court sustained the Internal Revenue Service (IRS) blocked income regulations. The case involved an IRS adjustment to royalty income earned by 3M US from a Brazilian subsidiary. Brazil limited by law the amount of the royalty and the parties agreed that an ‘arm’s length’ royalty would be larger. The taxpayer took the position that the IRS blocked income regulations, by requiring an inclusion of income that could not legally be paid, conflicted with the US Supreme Court decision in First Security Bank of Utah and so are ultra vires. The IRS sought to enforce its regulations and require the full arm’s length royalty inclusion on several bases, including that the Brazilian regulation applied only to the taxpayer and to royalties between related parties and was not publicly promulgated. In a 9-8 decision the Tax Court sided with the IRS and distinguished First Security Bank of Utah on the basis that the regulations then at issue included language requiring the taxpayer to have “complete power” over the money that could have been paid, while the regulations at issue in 3M had dropped that language. The case is on appeal.

Q. In your opinion, do companies pay enough attention to the challenges and complexities of maintaining compliant transfer pricing policies?

Armitage: Companies generally do pay attention to their transfer pricing. They generally develop transfer pricing documentation for their most material transactions and establish reserves when there are areas of material uncertainty. Some judgment must be brought to bear on what to cover since covering all transactions, regardless of size and risk, could be prohibitively expensive.

Q. To what extent have the tax authorities in your country of focus placed greater importance on the issue of transfer pricing in recent years, and increased their monitoring and enforcement activities?

 Armitage: For the past 15 to 20 years, the IRS has dedicated material resources to identifying large dollar transfer pricing adjustments and designating them for litigation. However, the IRS recently changed its audit practices regarding transfer pricing documentation. Instead of routinely requesting transfer pricing documentation at the start of an audit, the audit team now generally has discretion on whether to request documentation and whether to pursue a transfer pricing issue. Some audits – even of large multinationals – now do not involve transfer pricing components. It will be interesting to see if the IRS’s shift on this issue portends less IRS attention to transfer pricing or causes taxpayers to reduce their focus on transfer pricing preparedness.

To access the full roundtable article, please visit Financier Worldwide's website or click on the PDF in the Related Materials below.