Department Of Treasury – Transfer Pricing Examination Process And Updates (Part IV)

IRS , TaxConnections, Transfer Pricing Examination Process Updated

(The Transfer Pricing Examination Process was recently updated by the Department of Treasury – June 2018. TaxConnections posts this valuable eight part a series to keep you informed of these changes.)

II. Execution Phase
Stages of issue development include determining the facts, applying the law to those facts, and understanding the various tax implications of the issue. The issue team should conduct interactive discussions, including using the IDR process to develop the
facts. Every effort should be made to resolve any factual differences. Open communication and continuous reassessment should continue throughout the Execution Phase.

A. Risk Assessment

1. Review IRC Section 6662(e) Response
The issue team will review and analyze the taxpayer’s IRC Sec. 6662(e) documentation prior to the taxpayer orientation meetings and note areas that require further development, confirmation, or inquiry:

• Coordinate and update the initial risk analysis, timeline, examination plan, and
working hypothesis with issue team members
• Evaluate taxpayer’s best method selection and the potential applicability of various methods
• Consider whether the transfer pricing documentation meets the requirements of Treas. Reg. Sec. 1.6662-6(d)(2)(iii)
• Determine whether the documentation covers all material controlled transactions
• Consider whether additional information may be necessary regarding Subpart F or other tax implications

Best Practice: In evaluating the taxpayer’s documentation, the issue team should consider not only whether the documentation requirements of Treas. Reg. Sec. 1.6662- 6(d)(2)(iii) are met, but also whether the documentation reasonably addresses the controlled transactions and whether the conclusions reached therein can be considered reasonable.

Helpful References:
IRM – IRC Section 6038A and 6038C Penalty Cases
IRM Exhibit 4.60.8-1 – Index to IRC 6038A Exhibits
Practice Unit on IRC 6662(e): Calculating the Net Adjustment Penalty for a Substantial Valuation Misstatement Instructions for Examiners on Transfer Pricing Issue Examination Scope – Appropriate Application of IRC 6662(e) Penalties

2. Request Financial Statement Orientation
The issue team will prepare an IDR to request a financial statement orientation to be conducted within 30 days from the opening conference. The orientation meeting should be scheduled to coordinate availability of the issue team. Generally, the financial
statement orientation IDR should request, but not be limited to the following:

• A walk-through of the geographic, legal entity, tax, and functional organizational charts, and all reporting platforms that exist (for example, different management reporting platforms)
• Provide the taxpayer the opportunity to voluntarily walk the issue team through its CbC report. Refer back to section I.C.4. – Analyze the Country-by-Country Report, of this document for additional information
• Reconciliation from the geographic trial balance to the SEC Form 10-K consolidated financial statements
• Reconciliation between foreign accounting standards and Generally Accepted Accounting Principles (GAAP), for example International Financing Reporting Standards v. GAAP
• Segmented financial statements and roll ups to the consolidated financial statements, including roll ups of Disregarded Entities into Controlled Foreign Corporation (CFC) owners
• Map from the tax return to the trial balance to the general ledgers
• Work papers for book/tax differences
• Year-end and month-end adjusting entries
• True-up entries
• Chart of accounts
• List of cost centers and profit centers
• Taxpayer’s relevant accounting practice and policies

3. Request Transfer Pricing/Supply Chain Orientation
The issue team will prepare and issue an IDR requesting a transfer pricing/supply chain orientation meeting:

• The orientation should be conducted early in the execution phase of the examination but after the financial statement and accounting records orientation is held
• The orientation should be scheduled to coordinate with the availability of all members of the issue team
In order for the issue team to fully understand the taxpayer’s transaction, request a transfer pricing/supply chain orientation from the taxpayer, which should include, but not be limited to:

• The taxpayer’s background and the history of intercompany transactions
• Selected intercompany transactions in the year(s) under examination:
– The taxpayer’s rationale for entering into the transactions
– The taxpayer’s value driver(s) associated with the intangible, services, and/or tangible goods
– Whether the intercompany transaction is associated with the transfer of an income stream (e.g., change in functions, assets, or risks)
• The characterization and business reason for the transaction
• Identifying persons responsible for structuring the transaction from the tax planning perspective, including any step plans for structuring/restructuring including, but not limited to, special purpose or new entities
• The functions performed, assets employed, and risks assumed by each controlled party to the respective controlled transaction
• The total profits or losses associated with each material controlled transaction and each controlled party’s share of the total profits or losses
• How the preparer of the transfer pricing study gained knowledge of each controlled party’s functions performed, assets employed, and risks assumed (for instance, interviews or minutes)
• The need to request background documentation or identify the taxpayer and/or preparer personnel to interview
• The need to request additional documentation, including contracts and agreements
• The transfer pricing methods selected by the taxpayer for significant transactions

Best Practice: Discuss processes for requesting follow-up meetings and clarifications.

4. Update Risk Assessment
The issue team will hold reassessment meetings throughout the Execution Phase, with the Practice Network members, LB&I Division Counsel, and respective managers:

• Discuss any new information and reassess/adjust working hypothesis(es)
• Determine which transactions warrant further development or whether issues should be closed
• Determine whether additional transactions should be added for further analysis
• Collaborate with APMA for potential issues involving a tax treaty partner
• Discuss what has been done and needs to be done to complete the issue(s). The Estimated Completion Date (ECD) may need to be reevaluated as the examination progresses
• Continually monitor and reassess the resources available for issues being examined. Assess level and scope of Counsel’s involvement and begin to consider any discrete legal issues
• Assess resource/outside expert needs. In any transfer pricing case that may require outside expert consideration, TPP should be involved early in the examination process. Document concurrence of a TPP Territory Manager with any request for outside expert assistance on transfer pricing issues:
– Work with the TPP and LB&I Division Counsel to request outside experts, as necessary
– Review the Outside Expert Program website
• Continue to document, organize, and outline transactions determined to warrant further development and analysis based on information gathered to date
• Evaluate the taxpayer’s selection of the best method:
– Consider whether the characterization of the transaction is framed
– Assess the degree of comparability between controlled and uncontrolled transactions and the reliability of the assumptions and completeness and accuracy of the data used in the taxpayer’s selected best method
– Determine additional accounting data and records needed for this
– Follow the Revised Instructions for LB&I on Transfer Pricing Issue Selection and Scope of Analysis – Best Method Selection. It is important for issue teams to begin the approval process as early as possible.

This Is Part IV of VIII On Department of Treasury- Transfer Pricing Examination Process And Updates. Click To Part III Click To Part V




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