The IRS Large Business and International (“LB&I”) Division released five Directives on new transfer pricing examination procedures and policies. All these Directives enter into force on their publication date.
The existing requirements for LB&I team managers and examiners for issuing the transfer pricing IDR were first introduced in January 2003. This new Directive, Interim Instructions on Issuance of Mandatory Transfer Pricing Information Document Request (IDR) in LB&I Examinations, reviews the previous directive and excludes some cases from the mandatory transfer pricing IDR. All cases are not obliged to apply for the issuance of the Mandatory Transfer Pricing IDR unless: first, an LB&I campaign containing guidance on issuing a Mandatory Transfer Pricing IDR should observe the IDR; second, for examinations with initial indications of transfer pricing compliance risk (considering the volume and type of transactions), Transfer Pricing Practice (TPP) and/or Cross Border Activities (CBA) Practice Area employees will issue the Mandatory Transfer Pricing IDR if assigned to the case, but if TPP or CBA resources are not assigned as a consultant or team member to the case, the Mandatory Transfer Pricing IDR will not be issued.
The Directive, Instructions for LB&I on Transfer Pricing Selection and Scope of Analysis - Best Method Selection, applies to examinations of LB&I taxpayers (i.e., assets equal to or greater than $10,000,000) and taxpayers in the Advance Pricing Agreement (APA) program, providing instructions with respect to certain scope limitations on transfer pricing analysis. During the course of an examination’s factual development of related party transactions, if there are other more reliable methods than the taxpayers’ chosen method to measure the arm’s length result, the approval process under this Directive for the alternative method must be used. Alternatively, if the APA team concludes a method more reliable than the taxpayers’ chosen method to measure the arm’s length result, given the particular facts and circumstances, the approval process under this Directive must be followed.
The Directive, Instructions for Examiners on Transfer Pricing Issue Examination Scope - Appropriate Application of IRC §6662(e) Penalties, provides instructions on penalties when the taxpayer fails to create or to timely provide IRC §6662(e) documentation or when the IRC §6662(e) documentation provided is unreasonable or inadequate, assuming the net adjustment penalty thresholds are met.
The Directive, Instructions for Examiners on Transfer Pricing Issue Selection- Cost-Sharing Arrangement Stock Based Compensation, provides that when subsequent platform contribution transactions (PCTs) are added to an existing CSA, developing adjustments to CSAs based on changing the taxpayer’s multiple reasonably anticipated benefits (RAB) shares to a single RAB should be stopped until a Service-wide position is finalized.
The Directive, Instructions for Examiners on Transfer Pricing Selection- Cost-Sharing Arrangement Stock Based Compensation, provides that current issues related to stock-based compensation (SBC) included in CSA intangible development costs (IDCs) should be in abeyance until the Ninth Circuit issues an opinion in the Altera case on appeal.
Sources: IRS-Mandatory TP IDR, IRS-Best Method Selection, IRS-Examiners on TP Issue Examination Scope, IRS-Selection in Cost Sharing Arrangements, IRS-Selection in Cost-Sharing Arrangement Stock Based Compensation
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