Financier Worldwide World Watch: Transfer Pricing 2025
Clark Armitage offers insights in World Watch: Transfer Pricing for the March 2025 issue of Financier Worldwide Magazine.
Q: Could you provide an overview of the main trends currently shaping the transfer pricing (TP) environment?
Armitage: The IRS ‘Advance Pricing and Mutual Agreement (APMA) Program’, which handles MAP and APA cases, has become more selective about accepting APAs. We now have experience with the types of cases that are not being accepted. They largely are unilateral APAs that do not involve a material existing dispute. APMA’s decision not to accept these cases seems counterproductive. In the first instance, it is often the unilateral APA that prevents non-U.S. disputes. Unilateral U.S. APAs show non-U.S. exam teams that the taxpayer’s TP memoranda has been challenged and survived the rigours of an APA due diligence process. In our experience, these presentations are generally successful. Without the APA, countries are more likely to make an adjustment, thus defeating the purpose of the IRS not accepting the case – that is, to reduce its inventory.
Q: What challenges face multinationals in their efforts to maximise tax efficiencies while meeting compliance requirements?
Armitage: The 2017 reduction of the U.S. corporate income tax rate – from 35 percent to 21 percent – and introduction of the global intangible low-taxed income (GILTI) regime, which increased the current taxation of foreign income of US MNEs from as low as 0 percent to at least 10.125 percent, did much to discourage US MNEs from shifting income offshore. The contemporaneous introduction of the foreign-derived intangible income (FDII) regime, providing for a 13.125 percent rate on certain U.S. activities targeted at foreign consumers, further discouraged rate arbitrage. These rate incentives come with their own compliance requirements, which, particularly for FDII, can be difficult to meet. Beyond those requirements, the US corporate income tax rate structure has the effect of largely divorcing compliance considerations from tax rate considerations.
Q: Have you seen a noticeable increase in TP disputes between companies and tax authorities in recent times? What options are available to resolve such disputes as efficiently as possible?
Armitage: The IRS continues to focus on TP issues during audit and has recently begun asserting not only that the taxpayer’s transactions were improperly priced, but also lacked economic substance and so should not be respected as transactions. The assertion of economic substance claims has been encouraged by the IRS national office and is sometimes used to disregard the existence of non-U.S. legal entities that were properly formed and are part of the taxpayer’s structure. These challenges can be improper and will soon be challenged in U.S. courts.
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