Transfer pricing practitioners, including both in-house officers and advisors, should welcome the idea of more Internal Revenue Service audits, and even litigation.
For those still reading, put down the pitchforks and hear me out. As any battle-hardened TP professional knows, the US has some of the most detailed transfer pricing regulations in the world. Despite (or perhaps because of) this, ambiguity and uncertainty prevail in many of the most complex and important subjects, including:
- Economic substance
- IP valuation and cost-sharing arrangements
- The "commensurate with income" standard
- Comparability in the context of the modern economy.
The fact is that even the most prescriptive and example-laden regulations don’t create certainty—real-life experience does. Most of the clarity in transfer pricing comes from the ability of practitioners to apply lessons from historical outcomes of audits, disputes, and litigation. By contrast, when controversy volume is low and litigation is mostly limited to a subset very large taxpayers, aggressive positions quietly spread and conservative taxpayers overcorrect, with many companies looking to comply with certainty in the grey zone of “probably fine.”
Granted, the results of IRS audits are not always internally consistent, and even the US Circuit Courts have held contradictory positions when interpreting the regulations. But more audits and rulings would take out much of the guesswork, establishing clearer boundaries, relevant precedents and a better return on investments in tax planning and advice.
More controversy will certainly result in more short-term headaches. But taxpayers are currently being shortchanged by a rules-heavy, applications-light system that requires them to navigate some of the most consequential tax questions with an outdated road atlas. Perhaps a fair compromise is to root for more active IRS examiners—while hoping they pick someone else to serve as the valuable data point.
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