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Feds and States Get Better Organized to Dispute Transfer Pricing
Daniel Falk, Managing Director, National Transfer Pricing Practice Leader
Justin Smith, Director of Transfer Pricing
As both the federal government and the states increasingly turn to transfer pricing as a tool for raising revenues, the IRS and various state taxing authorities have recognized the need to get better organized to effectively uphold existing transfer pricing rules and regulations. Both have taken recent steps to increase resources aimed at enforcing transfer pricing rules, as well as improving the effectiveness of those resources.
IRS Transfer Pricing Roadmap
On February 14, 2014, the Transfer Pricing Operations ("TPO") of the Large Business and International ("LB&I") division of the IRS released its Transfer Pricing Audit Roadmap ("Roadmap") to the public. The Roadmap is described by the TPO as a "practical, user-friendly toolkit organized around a notional 24-month audit time-line." The intent of the Roadmap is to increase transparency into how the IRS conducts a transfer pricing examination, as well as to put a concrete workplan into place for the TPO to execute its transfer pricing audits.
This is the most recent in a series of steps, starting with the creation of TPO itself, to mold the IRS' transfer pricing exam group into something that has the look and feel of a professional services organization, rather than a government bureaucracy. The Roadmap is organized consistently with the IRS' Quality Examination Process into three phases: Planning, Execution, and Resolution. Within each phase, a specific framework is given with the intent of aiding the exam teams in moving cases forward more efficiently.
Some of the guidance provided is strikingly positive. In the opening paragraphs of the Roadmap, and consistently throughout the framework, there is recognition that "transfer pricing cases are usually won and lost on the facts." There is consistent emphasis reminding the exam team of the importance of first building a solid understanding of the facts before forming hypotheses and ultimately reaching conclusions.
Additionally, there is a great deal of guidance aimed at decreasing waste in the exam process. Best practices are established to help minimize IRS resources being wasted by chasing insignificant or unsubstantiated issues. Guidelines are also established for collecting and analyzing data and factual information before sitting down with the taxpayer to "understand the business." The Roadmap even provides a detailed list of the various forms and types of data and information that a member of the exam team should be seeking out to gain a better understanding of the facts and circumstances. Some of that information can be found in the public domain and would not need to be requested directly of the taxpayer (i.e.,SEC Form 10-K and other public filings).
Finally, there is great importance placed on communication between the IRS exam team and the taxpayer team, both in the initial phases of the exam and consistently throughout the exam process.
On the whole, the Roadmap is, at least on the surface, a step in the right direction-just how meaningful of a step will depend completely on how well it is applied in practice. The full text of the Roadmap can be found at:
Multistate Tax Commission Transfer Pricing Audit Program
Also this month, the Multistate Tax Commission ("MTC") announced plans to accelerate their development of a transfer pricing audit program. The MTC has been reaching out in recent months to the states to gauge overall interest in funding additional resources for the Joint Audit Program to assist it in complex transfer pricing audits. Many states have expressed interest in this program and the MTC has responded by soliciting outside transfer pricing auditors and subject matter experts. The MTC is currently in the process of exploring its options for increasing the resources it is able to make available for transfer pricing disputes.
What it all Means
Taxpayers should fully expect to see both the quantity and quality of transfer pricing audits at both the federal and state level to increase over time. While more effective audits can on the whole result in positive changes for taxpayers, this does increase the need to ensure compliance with transfer pricing rules and regulations at all levels and in all jurisdictions. It also means taxpayers should take extra care in preparing in advance to defend their transfer pricing practices when (not if) it comes under scrutiny from a taxing authority.
True Partners Consulting's National Transfer Pricing Practice is comprised of a group of professionals with diverse backgrounds, including Big 4 and other professional services firms, as well as industry experience. The Transfer Pricing Practice has deep expertise not only in helping taxpayers prepare for the inevitable transfer pricing audits by helping them build and maintain their transfer pricing documentation and meet other compliance needs, but also in resolving disputes in an effective and constructive manner.
We encourage you to contact a member of your engagement team or one of the professionals listed in this publication to discuss any questions or concerns that you may have regarding what True Partners Consulting can do for your business.
Director of Business
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