Examination Guidance Provided by IRS and Other Transfer Pricing Updates from Q1 (article)
Between tax reform, new guidance from the Large Business and International (LB&I) Division of the IRS, and worldwide updates to improve the tax control framework, multinational companies are facing significant change. With the proper planning and knowledge, this can be a time of great opportunity. In this transfer pricing update, we will provide an overview of the key changes.
IRS Introduces Guidance to Examiners on Transfer Pricing Issues
In January, the LB&I provided administrative guidance to field auditors and examiners on several key transfer pricing examination issues. The guidance provides instructions for how to conduct transfer pricing examinations and handle advance pricing agreement (APA) applications. It also reveals important guidance for taxpayers involved in transfer pricing audits or APAs.
Key points include:
- Instructions for examiners on transfer pricing selection - cost-sharing arrangement (CSA) stock-based compensation and reasonably anticipated benefits in CSAs
- Instructions for LB&I on transfer pricing selection and scope of analysis for best method selection
- Instructions for examiners on transfer pricing examination scope – appropriate application of Section 6662(e) penalties
- Interim instructions on issuance of mandatory transfer pricing information document requests and LB&I examinations
These points reflect the IRS's intent to be more selective and strategic about the types of transfer pricing issues it decides to pursue. In particular, the instructions for examiners on Section 6662(e) penalties emphasizes that penalties may apply to a taxpayer if the taxpayer fails to create or timely provide transfer pricing documentation when the transfer pricing documentation provided is unreasonable or inadequate.
Belgian Transfer Pricing Audits: Increased Manpower and Effectiveness
The Belgian tax authorities issued a new wave of transfer pricing audits in February 2018. While the selection, criteria, and approach will remain relatively unchanged in 2018, they are expected to take effect in 2019 when Belgian authorities gain access to country-by-country reporting data and the Master File and Local File/specific Belgian Local Form.
The expected focus areas for the new wave of transfer pricing audits were inspired by recent international tax developments, including the revised OECD Transfer Pricing Guidelines. The Belgian tax authorities have indicated that more scrutiny will be paid to:
- (Captive) Re-Insurance
By investing in additional manpower, changing their investigative approaches, shifting focus areas, and stepping up national and international cooperation with other tax authorities, the Belgian tax authorities are hoping to audit transfer pricing and international tax matters in a more efficient way.
Mexico Amends and Australia Updates Instructions
Mexico recently amended the deadline for the informative statement on tax status (DISIF) so that the statement is now due on the same date as the annual tax return (March 31). This means that transfer pricing documentation will now need to be submitted prior to the tax return submission. Furthermore, the extension for the transfer pricing informative return on transactions no longer applies since DISIF is now due with the return.
In January 2018, the Australia Taxation Office released updated instructions for completing the Local File – Short Form. Companies with international related party dealing below AUD 2 million may file the Local File – Short Form, and the deadline to file is 12 months after the end of the reporting year. The requirement to submit a Local File applies to reporting beginning on or after January 1, 2016 and is part of Australia's Country-by-Country statements requirements, which also includes the Master File and CbC report.
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