IRS Issues Transfer Pricing Examination Process (Publication 5300 (6-2018))
The IRS recently issued the Transfer Pricing Examination Process (TPEP), which provides a guide to best practices and processes to assist with the planning, execution, and resolution of transfer pricing examinations consistent with the Large Business & International Examination Process, Publication 5125. The new TPEP guide will be shared with taxpayers by the IRS at the start of a transfer pricing examination to help taxpayers better understand the examination process and work more effectively with the examination team.
The TPEP replaces the previously-released Transfer Pricing Audit Roadmap, a guide that instituted an issue-based international campaign audit/examination strategy. The TPEP consists of three phases: planning, execution, and resolution. The TPEP also includes an example of a 36-month examination, which compares unfavorably to the 24-month illustration in the Roadmap, but neither timetable is/was mandatory on the IRS or enforceable by taxpayers.
As the TPEP notes, transfer pricing examinations are factually intensive and require a thorough analysis of functions, assets, and risks along with an accurate understanding of relevant financial information. They are resource intensive for both the IRS and taxpayers.
Multinational businesses can set their own intercompany pricing, but those prices need to be fair and at “arm’s length,” meaning the company would pay a similar price for an intercompany transaction as they would for a similar transaction with a third party. Transfer pricing examinations are used to ensure compliance with tax rules and regulations and limit tax evasion, which typically involves organizations transferring and recording higher income in lower tax jurisdictions to avoid paying increased taxes.
A company transfer pricing policy includes benchmarking, documentation, training, and can help businesses minimize compliance risk and potentially reduce their global tax rate.
Eide Bailly can assist with the assessment of risk and transfer pricing documentation to avoid future IRS examination surprises. Contact your Eide Bailly professional, a member of our international tax team, or Jason Fritts for additional information.