{{item.videoDuration}}
{{item.title}}
{{item.text}}
{{item.videoDuration}}
{{item.text}}
Transfer pricing audits have always placed significant emphasis on developing and supporting the underlying facts. However, taxpayers now are being asked to deliver large volumes of information and financial data. Given the detailed fact-finding, it is not uncommon for IRS examinations to extend several years, often placing great strain on taxpayers’ in-house resources.
Fact-finding in modern transfer pricing audits
The IRS’s approach to fact-finding has evolved in recent years. Information Document Requests (IDRs) have become more extensive and detailed, often framed in a manner resembling formal discovery requests. Transfer pricing audits could involve hundreds of IDRs, each potentially requiring significant information or financial data gathering. IDRs can be expected to extend beyond transfer pricing reports and include underlying analyses, internal materials, intercompany and third-party contracts, and supporting notes or summaries of functional interviews. IDRs can even be more invasive.
While often difficult and time-consuming to respond to, accurate IDR responses that consistently present the facts throughout the audit process are an important objective as they could be used by the IRS as key evidence in litigation that is akin to an admission by the taxpayer. Courts can give IDR responses significant weight.
Functional interviews are once again a regular part of the audit process. While virtual interviews are frequently used effectively by the IRS, in many cases, the IRS is still willing to travel internationally to interview key personnel employed in other jurisdictions. Many of the IRS’s interviews are conducted under oath with a court reporter.
The IRS has terminated the Acknowledgment of Facts (AOF) IDR process, which was initially intended to establish an agreed factual record at the conclusion of the Examination. While it rarely served its intended purpose (i.e., for the IRS and taxpayer to fully agree on the relevant facts for presentation at IRS Appeals), it will be interesting to see if there will be any effects on transfer pricing audits in the absence of the AOF IDR process that has been a fixture for some time now.
Audit timelines and tax department strain
Transfer pricing audits frequently extend over several years and could commence long after the transactions at issue occurred. A taxpayer’s personnel changes over time could affect the availability of institutional knowledge, making it difficult to confirm key facts or data sources/files, particularly where documentation is incomplete or dispersed across systems or jurisdictions.
In this context, the quality of transfer pricing documentation becomes particularly important. Transfer pricing disputes often turn on establishing the relevant facts. While transfer pricing documentation often is treated as a routine compliance exercise, documentation that includes a thorough functional analysis could be critical in providing a current and clear picture of the intercompany allocation of functions and risks. High-quality documentation typically depends on real-time interviews with relevant personnel, a careful analysis of intercompany contracts, and a clear articulation of the functions performed, assets employed, and risks assumed. Only after that foundation is established can an economic analysis meaningfully support the arm’s length nature of the pricing conclusions.
Given the scale of information requests and the duration of audits, documentation that is prepared proactively with potential controversy in mind could reduce the need to re-establish facts retrospectively, which can be both difficult and expensive for many taxpayers.
Dispute resolution considerations
When transfer pricing disputes are not resolved at the examination stage, attention often turns to dispute resolution alternatives. Transfer pricing adjustments inherently raise the specter of double taxation. For US-initiated adjustments, Mutual Agreement Procedure (MAP) generally should be evaluated at an early stage in the controversy lifecycle. OECD MAP statistics continue to show that resolution often is reached in MAP cases.
Additionally, advance pricing agreements (APAs) may be considered in cases involving recurring transfer pricing issues. For transactions involving complexity or ongoing uncertainty, APAs can establish agreed pricing approaches and reduce repeated examinations of the same issues across audit cycles. OECD APA statistics show that bilateral APA programs continue to expand, with more jurisdictions offering bilateral APAs and a growing share of transfer pricing inventories managed through APA processes. Even with increased completion times, APAs represent an attractive resolution forum for many taxpayers.
Current issues on the radar
Trending areas in transfer pricing disputes include the application of realistic alternatives, increased reliance on economic substance concepts, and the application of the commensurate-with-income principle. These matters are highly dependent on the underlying facts and the manner in which transactions are documented and analyzed. Careful fact development and well-supported contemporaneous documentation therefore remain central to audit readiness and dispute resolution.
{{filterContent.facetedTitle}}
{{contentList.loadingText}}
{{contentList.loadingText}}
Follow us
