The United States of America was one of the first countries along Great Britain to incorporate the Transfer Pricing rules more than eight decades ago, and these rules have evolved over time.
Currently, Transfer Pricing legislation in the United States is framed by Section 482 of the U.S. Tax Code, as well as Section 6662.
They are also regulated by Treasury Regulations 1.482, 1.6662, 1.6038A and 1.6038C and Revenue Procedures Nos. 99-32, 2015-40, 2015-41, 2007-13 and 2005-46.
In 2017, new tax reforms were approved, which included some in the area of Transfer Pricing. This tax reform was issued by the “Tax Reduction and Jobs Act“, with which provisions related to Base Erosion and Anti-Abuse Tax; Foreign Derived Intangible Income; Global Intangible Low Taxed Income and Section 250 and 951A of the Internal Revenue Code were established.
Transfer Pricing is defined as those prices or values for transactions performed among related parties, also called intercompany transactions.
It is also known as Arm’s Length principle, and it is the pillar that governs Transfer Pricing.
This is based on the fact that the prices agreed among related parties are in accordance with market value.
The Transfer Pricing legislation of the United States of America has adopted this principle in its Treasury Regulation §§1.482-1 to 1.482-9.
It states that in order to determine the actual taxable income of a controlled taxpayer, it must follow the Arm’s Length principle or standard, which will be verified if the results of the transaction are consistent with those that would have been agreed upon by uncontrolled or independent parties.
Under Treasury Regulation §1.482-1(i)(5), a related party or controlled taxpayer to any of two or more taxpayers who are directly or indirectly owned or controlled by the same interests.
The taxpayer who exercises ownership or control over the other taxpayers is included within the linkage.
In addition, the term control includes any type of control, whether direct or indirect, legally enforceable or not, and in any manner that can be exercised, including control what comes from the joint actions of two or more taxpayers acting with a single common objective or purpose.
Taxpayers who exert property or control over the rest of taxpayers, are included in the linkage.
Thus, under Treasury Regulation §1.482-1(i)(4) a presumption of control arises if income or deductions have been arbitrarily shifted.
Transfer Pricing methods in the American Legislation are governed by Treasury Reg. §§1.482-3(a), -4(a), -7(g) (1), and -9(a).
The types of methods depend on the type of transaction to be analyzed in order to see if the Arm’s Length principle is complied.
Thus, in the case of transfer of tangible property, one of the following methods may be used:
Also, in the case of a transfer of an intangible asset, the American legislation provides the following methods:
Regarding to services performed among related parties, the U.S. transfer pricing standard identifies the following methods:
The taxpayer shall choose the best method for the analysis of the related party transaction.
The taxpayer who performs transactions with related parties must have documentation that proves the agreed values being according to the Arm’s Length principle, in order to be filed to the Internal Revenue Service (IRS) when required.
Such documentation shall contain the following information:
Such information must be filed to the IRS within 30 days of being requested.
It should also be noted that the aforementioned documentation must be available for any transaction among related parties, due to the Transfer Pricing legislation in the United States of America has not established exception thresholds.
The Transfer Pricing regime in the United States of America has incorporated the third level of documentation for this matter, set by Action 13 of the OECD BEPS Plan.
Thus, Treasury Reg. § 1.6038-4 states that every parent of a U.S. multinational group must file a Country-by-Country Report (CbC Report).
Nonetheless, they will be exempt from the affidavit if the annual income of the Multinational Group is less than $850,000,000.00, pursuant to Treasury Reg. § 1.6038-4 (h).
This report must be filed on Form 8975, which must contain information on each of the entities of the group, such as their identification on each of their jurisdictions, and financial and tax information such as income generated, taxes paid or accumulated losses.
The IRS has been implementing guidelines in order to have better practices regarding Transfer Pricing.
Thus, in 2018 this Tax Administration issued the “Transfer Pricing Examination Process“, providing a framework and guidance for the examination of these.
Transfer Pricing sanctions are governed by Section 6662(e)(3) of the United States Tax Code.
Thus, if the IRS observes that the prices agreed among related parties are not in accordance with the Arm’s Length principle, the former may impose a fine of up to 20% if the price is 200% higher or less than 50% of the price that should have been agreed based on the aforementioned principle.
This fine will increase to 40% in case the Transfer Price is 400% higher or 25% lower than the Arm’s Length price.
The sanction may only be imposed when the prices comply with the thresholds quoted above. Nonetheless, the sanction may be waived to the extent that the taxpayer demonstrates reasonable cause for the fixing of the declared price, which will be achieved on the basis of the documentation indicated above.