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.
Fortunately for multinational companies operating in the U.S., an important document exists that can help taxpayers be better prepared for the eventual IRS transfer pricing exam: The Transfer Pricing Examination Process, Publication 5300. Originally released by the Treaty and Transfer Pricing Operations (TTPO)2 group of the Large Business and International (LB&I) division of the IRS on June 29, 2018, the TPEP is a 37-page guide to audit steps, best practices and resources to assist with transfer pricing examinations, consistent with the LB&I Examination Process (LEP), Publication 5125. Prepared by the IRS for its issue teams to help them be better prepared to examine the transfer pricing positions of taxpayers, the TPEP lays out in considerable detail the process and expectations surrounding such an examination. With the issuance of the TPEP, the Transfer Pricing Audit Roadmap (“Roadmap”), which was not an official IRS Publication but was issued on February 14, 2014, was retired.
All three publications – LEP, TPEP and the former Roadmap – are similarly structured with three main phases: Planning, Execution and Resolution. The TPEP provides a framework and guide for transfer pricing examinations, and it is intended to be shared with taxpayers during an examination to facilitate an understanding of the process and provide insight into what is expected. This transparency is intended to help improve communication and efficiency. Although the TPEP is not mandatory or enforceable, taxpayers can refer to the TPEP in discussing a particular transfer pricing exam with an IRS issue team 3 or when elevating an issue within the IRS when an examination departs from the TPEP.
The TPEP acknowledges that transfer pricing examinations “…are resource intensive for both the IRS and taxpayers.” This acknowledgment is a key motivation for the TPEP in providing guidance to assist the IRS to identify situations that warrant transfer pricing examinations through a risk assessment. “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.” If the IRS team determines that a transfer pricing examination is warranted, the TPEP serves as a guide to specify leading practices, data requests, analytics and available resources in all three exam Phases. TTPO will continue to review the TPEP and make changes over time as new techniques arise or additional reference materials become available.4
Stay tuned for next week’s blog post, which will highlight the essential aspects of the TPEP Planning Phase.
GO TO PART 2 Of SERIES
1 BEPS is a global effort to coordinate issues related to preventing companies from unfairly and artificially reducing taxable income (e.g., via tax structures and transfer pricing). A key aspect of BEPS is to align transfer pricing outcomes with value creation (see: “Assessing Value Creation for Transfer Pricing “ by Mansori and Sanschagrin published in the March 28, 2016 issue of Tax Notes International.
2 In 2017, Transfer Pricing Operations became Treaty & Transfer Pricing Operations (TTPO).
3 IRS transfer pricing issue teams are typically comprised of an Economist, a Tax Law Specialist, and Revenue Agents.
4 As of August 2020, the most recent TPEP release is Publication 5300 (5-29-2019), Revised June 6, 2019.
If you have any questions or would like more information on the issues discussed in this article, please contact the authors:
Guy Sanschagrin, Principal in Charge of Transfer Pricing and Valuation Services, WTP Advisors, firstname.lastname@example.org
Doug Schwerdt, Transfer Pricing and Valuation Specialist, WTP Advisors, email@example.com
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