IRS FAQs highlight transfer pricing documentation best practices

May 28, 2020
International tax Transfer pricing

The Internal Revenue Service published guidance entitled Transfer Pricing Documentation Frequently Asked Questions (FAQs) on April 14, 2020. The FAQs were developed consistent with a 2018 Directive issued to employees of the IRS Large Business & International (LB&I) Division which, in part, sought to incentivize taxpayers to improve the quality of their documentation. While the source of the questions is not identified in the guidance, it reiterates the observation of a 2018 Public Report of the Internal Revenue Service Advisory Council LB&I Subgroup that some stakeholders in the U.S. transfer pricing community believe the quality of transfer pricing documentation has declined.

Overall, the guidance seeks to provide reminders about the relevant transfer pricing rules and offer insights about documentation best practices.  If implemented appropriately, these best practices could potentially lead to a more efficient audit process and even the deselection of transfer pricing as an issue under consideration, according to the FAQs.

The FAQs can be read on the IRS website. However, a summary of the overall themes is provided below.

  • Having robust transfer pricing documentation can often lead to shorter IRS examinations and protection from certain penalties described in Internal Revenue Code (IRC) section 6662(e).
  • Taxpayers’ self-assessment of their transfer pricing policies and associated analyses can help identify any potential areas of noncompliance before they arise during IRS examination.
  • The qualitative sections of the transfer pricing documentation should provide context for the related party transactions included, and link company facts to the transfer pricing analysis(es).
  • Transfer pricing analysis’s adjustments should be considered to account for any differences in comparability factors. Reasons for making these adjustments should be documented and supported within the transfer pricing documentation.
  • Overall, transfer pricing documentation should be thorough and demonstrate a clear picture of the taxpayer’s operations and intercompany transactions. In addition, transfer pricing analyses should consider the entire functional and risk profiles of the controlled entities when evaluating the consistency of the related party transactions with the arm’s length standard.

The IRS FAQs present an opportunity for taxpayers to revisit their U.S. transfer pricing documentation and approach. Thorough, robust transfer pricing documentation is the primary line of initial defense under audit.

How can we help?

If your documentation fails to address the key issues raised therein, taxpayers should seek assistance from transfer pricing professionals to make appropriate updates. Contact us today.

RSM contributors

  • Alex Hsieh
    Alex Hsieh
    Senior Associate
  • Nina Heindel
    Senior Manager