Transfer Pricing Roadmap Gives Insight on Examination Issues (article)
In February 2014, the IRS Transfer Pricing Operations (TPO) team issued a Transfer Pricing Audit Roadmap. The roadmap is intended to assist IRS examination teams with developing and auditing transfer pricing issues. The creation of this roadmap reflects the Service's increased focus on transfer pricing issues. The roadmap also gives us insight into which transfer pricing issues will be scrutinized more closely and what kind of documentation the IRS expects to support the taxpayer's position.
With the pragmatic revenue raising goals involved with transfer pricing audits, the TPO is focused on developing high risk issues around intangibles, hybrid instruments and other perceived income shifting transactions. Also, taxpayers' worldwide effective tax rates and risk based assessments based on industry profitability ratios will be used to identify and select transfer pricing audit targets.
Because transfer pricing is a facts and circumstances driven discipline, transfer pricing audits will involve significant time fact finding and understanding the taxpayer's story, i.e. the functions, assets, risks and whether or not the facts provide a compelling support of transfer pricing positions.
Quality transfer pricing documentation provides the taxpayer the opportunity to tell a "compelling story" to the IRS and may provide protection from penalties if prepared contemporaneously. Even with transfer pricing documentation in hand, however, taxpayers should be prepared for examiners to request increasing amounts of background documentation and source information, such as intercompany agreements, financial and accounting data, employee details, and entity structure information. Transfer pricing audits are increasingly seeking an understanding of taxpayers' worldwide operations and tax positions.
Transfer pricing is an area of risk quickly escalating beyond just tax and finance departments as executives are increasingly recognizing the significant financial risks, controversy risks and reputational risks that must be strategically assessed and mitigated.
The transfer pricing audit roadmap is one more step in the increasing focus the IRS is placing on transfer pricing, coinciding with mounting foreign country focus. Countries are increasingly prioritizing transfer pricing enforcement as a necessary tax base defense and probable revenue raiser. Media attention is bringing transfer pricing risk into the forefront for multinational executives, and global initiatives such as the OECD Base Erosion & Profit Shifting (BEPS) project reflect the global appetite for transparency and corporate responsibility.
Based on the new audit roadmap, taxpayers with any of the following characteristics have a higher risk of inquiry:
- Inbound taxpayers with sustained losses;
- Taxpayers involved in high risk or significant transactions with affiliates in tax havens;
- Taxpayers exploiting valuable intangible property (consider those with significant R&D); and
- Taxpayers with a high volume of related party transactions.
For more information on the Service's increased focus on transfer pricing issues, see our August 2013 Federal Tax Alert, Transfer Pricing Enforcement Continues to Evolve at the IRS. To learn more about the transfer pricing roadmap or how to prepare adequate transfer pricing documentation, contact your local CBIZ MHM tax advisor who will put you in contact with one of our transfer pricing specialists.
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