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November 30, 2018


Are they consistently telling the same story? Are they in alignment? Do you have reconcilable differences duly noted? Have you made changes in your transfer pricing documentation (TP documentation) due to BEPS, tax reform and other global obligations? 

The IRS just recently released new guidance on TP documentation 

The IRS has issued new field audit guidance for transfer pricing audits that may affect both US and foreign-owned companies with cross-border transactions. This Transfer Pricing Examination Process (TPEP) replaces the IRS' Transfer Pricing Audit Roadmap released in February 2014. 

The new guidance will now mandate that tax auditors have less discretion to dismiss a taxpayer's transfer pricing analysis approach if companies have adequate TP documentation. Also, the IRS is using data analytics to identify issues for examination that have the most significant risk for non-compliance. 

Notable changes under the TPEP: 

  • Auditors are not required to request transfer pricing documentation unless deemed a concern during the risk assessment phase. If an auditor asks for documentation, a taxpayer can anticipate that a transfer pricing issue was identified as a risk.
  • Practically speaking, if the IRS decides to request TP documentation, data analytics have indicated the risk is prevalent with respect to your transfer pricing. 
  • IRS auditors must now consider and evaluate the economic analysis included in a taxpayer's documentation, rather than disregarding a taxpayer's approach without review. A field auditor is now required to request managerial approval to apply another approach.
  • Consequently, a taxpayer that proactively prepares a transfer pricing analysis limits the IRS' ability to apply their theory on TP analysis during an audit.

The takeaway

Companies that proactively prepare transfer pricing documentation reduce the risk of adjustments from the IRS. The new TPEP represents a more practical approach for the IRS in auditing multinational companies. While fewer companies may be selected for audit, multinationals selected can expect a thorough review of documentation. 


Now that the importance of TP documentation has been renewed/emphasized, companies now have to worry about whether their TP documentation addresses the recent BEPS and tax reform initiatives (BEAT, GILTI and FDII).

With any new regulatory framework, companies need to adjust their administrative reporting or even restructure their international operations to comply with the new rules. Though administratively burdensome, following the rules seems simple enough. However, companies need to be cautious and thorough when complying with new regulations to make sure all of their tax and accounting reporting is telling a consistent story with their transfer pricing. Otherwise, inconsistency could flag an IRS or foreign tax authority audit. 

Please note that BEPS Action 13 documentation is no longer just a transfer pricing report. It is a Master file, Country-by-Country Report and Local file for each global entity. That in and of itself is a lot of information to maintain consistently.

The moral of the story is any intercompany transaction, regardless of the transaction type (i.e., sales of goods, global service contracts or financing), will be reported by every tax function in various ways. The key is to communicate between tax groups and maintain reporting consistency to reduce risk on a global basis, not just a tax line of service basis. 

In summary, TP documentation and tax returns should be in alignment as your company is addressing tax reform. Contact us at one of our many locations to learn more.

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