Recent Transfer Pricing Litigation in the U.S.

Eaton and Medtronic cases leave a precedent in transfer pricing in favor of the taxpayer.

The U.S. courts have issued rulings in two important cases in the history of transfer pricing litigation in the United States. We discuss the Medtronic Inc. and Eaton cases, resulting in an opinion adverse to the IRS. 

The Medtronic Case

A process began in 2011 when the medical device manufacturer filed a petition to the Tax Court challenging more than $1.300 million in deficient IRS assessments during the 2005 and 2006 tax periods.  

The Tax Court’s first ruling handed down in 2016 sides with Medtronic on one of the most problematic transfer pricing issues (whether the royalty owed by a subsidiary abroad to its U.S. parent for intangible property rights should be valued using the Comparable Uncontrolled Price Method or the Comparable Profits Method).  

In Medtronic and related cases, the CUP method is the taxpayer’s method of choice, while the IRS favors the CPM. Finally, the Tax Court rejected both methods proposed after a successful appeal to the IRS in the Eighth Circuit and the second trial in 2021.  

Although the IRS resulted economically benefitted in 2016, it negatively impacted the Tax Authority’s campaign to gain greater judicial acceptance of the CPM. 

The Eaton Case

This case concerns the IRS’s discretion to cancel an Advance Transfer Pricing Agreement (APA), which is an agreement between the Tax Authority and the taxpayer on choosing the appropriate transfer pricing method and how to apply it.  

The reason for such reversal was due to a series of inadvertent but large tax compliance errors and reported errors. This year, the Sixth Circuit affirmed the Tax Court’s 2017 ruling, which held that the IRS’s reversal decision was an abuse of discretion. In this regard, the IRS’s appeal was dismissed. 

Source: Forbes 03/10/22

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