In the ever-changing field of international corporate taxation, the transfer pricing policies of US subsidiaries of foreign corporations are becoming increasingly important. The Inflation Reduction Act (IRA) has increased the financial resources of the US Internal Revenue Service (IRS). Among other things, the IRS invests these resources in monitoring and enforcing tax regulations for complex partnerships, large companies and high-income and wealthy individuals.
In this context, the IRS is targeting US subsidiaries of foreign companies to ensure that they comply with their tax obligations, particularly with regard to compliance with the Transfer Pricing Regulations.
Warning from the IRS
As a result, the IRS has sent letters (Letter 6608) to US subsidiaries of foreign companies that have entered into transactions with their related parties and reported losses or small profit margins in the years 2017 to 2021.
Reported losses or low profit margins are seen by the IRS as possible indications that intercompany transactions may not comply with transfer pricing rules. The letters sent urge US subsidiaries to review their transfer pricing policies and amend their tax returns as they deem appropriate.
The IRS advises the recipients of these letters that Section 482 of the Internal Revenue Code authorizes it to adjust income, deductions and credits of affiliated corporations to prevent tax evasion.
The letters sent are a clear signal that the IRS is paying increased attention to transfer pricing issues in the future.
Why is there a focus on transfer pricing?
Transfer pricing refers to a set of rules and methods for pricing intercompany transactions between companies that are related through ownership or management relationships. If transfer pricing regulations are applied incorrectly, there is the possibility of group profits being shifted to different jurisdictions.
The non-compliant application of transfer pricing rules can therefore have a significant impact on where and to what extent the profits of a corporate group are taxed. The IRS focuses on US subsidiaries of foreign companies that operate in the USA but do not, in their view, adequately fulfill their tax obligations. The reported profits and losses of these companies are used as an indicator of possible irregularities.
How to ensure compliance with transfer pricing regulations?
Given the IRS's clear focus on transfer pricing issues, it is advisable for international mid-sized groups with a presence in the US to take steps to ensure compliance with transfer pricing regulations. In this context:
- Prepare proper documentation: it is critical to maintain detailed and comprehensive documentation of all intercompany transactions, and the pricing methodologies applied to them. In the event of a tax audit, this documentation serves as decisive proof of the correct application of and compliance with transfer pricing regulations.
- Regular updates of applied transfer pricing guidelines: Applicable transfer pricing rules and standards are closely linked to business and general economic conditions. Therefore, it is important to regularly review and adjust applied transfer pricing policies to ensure that they reflect current economic conditions.
- Preparation for possible tax audits: In view of the likely increase in tax audits, it is advisable to review the transfer pricing policy within the corporate group and adjust it if necessary.
Summary
The IRS is showing a strong interest in the transfer pricing policies applied by US subsidiaries of foreign companies. It is to be expected that this interest will continue to increase in the future. In this context, the evaluation of applied transfer pricing policies of multinational groups with subsidiaries in the United States is advisable at this time.