While we have periodically written about the Transfer Pricing Examination Process, Publication 5300 (TPEP) and its predecessor, the Transfer Pricing Audit Roadmap, for this blog post we revisited the TPEP to determine how well this IRS guidance and our initial insights on it have withstood the test of time relative to our field-based transfer pricing (“TP”) experience since the TPEP’s initial 29 June 2018 release. This blog post is a companion to our article “Impactful FYE Transfer Pricing Examination Preparedness Measures” in the December 2020 TGS Global AMÉRICA Regional Magazine. Following are six TPEP takeaways that we have found to be even more important today than a few years ago.
1. Robust documentation is the first and best line of defense against an IRS TP adjustment and non-deductible penalties and interest.
The IRS guidance, Transfer Pricing Examination Process, Publication 5300 (TPEP), released in June 2018, is more relevant now than ever before. There is a broad consensus among transfer pricing and international tax practitioners that tax authorities around the globe will step up transfer pricing audit activity within the next year as a means to recoup lost tax revenue resulting from the pandemic-induced recession. Fortunately, for US-based entities in multinational enterprise (MNE) groups, the IRS has in recent years issued taxpayer guidance on how to prepare for transfer pricing examinations. This series of blog articles is structured to help tax executives quickly get up to speed with the IRS’s guidance on transfer pricing examinations and its expectations on documentation.
In this first installment we introduce the TPEP. The next three installments of this series highlight and summarize the essential aspects of the three TPEP Phases: Planning, Execution, and Resolution. Subsequent installments examine how the TPEP diverges from the Transfer Pricing Audit Roadmap, its predecessor guidance, and provide TPEP insights in the form of useful takeaways. Saving the best for last, the concluding article of this series will focus on the IRS’s most recent transfer pricing guidance, FAQs re Transfer Pricing Documentation Best Practices.
IRS transfer pricing examinations can be unpleasant experiences for taxpayers. Chances are, an international business in the U.S. – whether it is headquartered in the U.S., or a subsidiary of a foreign parent – is going to have its transfer pricing examined by the IRS at some point. Transfer pricing has been cited by IRS officials for years as one of their most important enforcement priorities. But as a direct result of the OECD’s Base Erosion and Profit Shifting (BEPS)1 project, tax authorities around the world are actively engaged in the process of revising and tightening their expectations and requirements with respect to transfer pricing. The prospect of thorough and detailed examinations of taxpayers’ transfer pricing positions is growing every day.
(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.)
The Transfer Pricing Examination Process provides a guide to best practices and processes to assist with the planning, execution and resolution of transfer pricing examinations consistent with the Large Business & International (LB&I) Examination Process (LEP), Publication 5125. This guide will be shared with taxpayers at the start of a transfer pricing examination so they understand the process and can work effectively with the examination team.
Transfer pricing examinations are factually intensive and require a thorough analysis of functions, assets, and risks along with an accurate understanding of relevant financial information. They are resource intensive for both the IRS and taxpayers. To ensure
resources are applied effectively, LB&I is using data analytics to identify issues for examination that have the most significant risk for non-compliance. In addition, teams should continually assess the merits of issues during an examination.
Our goal in a transfer pricing examination is to determine an arm’s length result under the facts and circumstances of the case. Teams should keep an open mind during an examination to new facts as they are identified. Arm’s length results are rarely a precise answer, but instead may be a range of results. If the facts of the case show that the taxpayer’s results fall within an appropriate arm’s length range, then our resources should be applied elsewhere. Likewise, teams should continually assess opportunities for issue resolution with taxpayers during the examination process.
The Transfer Pricing Examination Process provides a framework and guide for transfer pricing examinations. Every transfer pricing issue is unique, and teams should exercise their judgment on how to best apply this guide. This guide will be updated regularly
based on feedback from examiners, taxpayers, practitioners, and others.