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Navigating Special Regimes in US Transfer Pricing: Permanent Establishments and SMEs

Permanent Establishments:

  • US domestic tax law does not recognize transactions between a US head office and a foreign branch for tax purposes, and the arm’s length principle does not directly apply.
  • Proposed global dealing regulations allow a branch of a foreign bank to recognize inter-branch dealings for tax purposes if conducted on an arm’s length basis.
  • US domestic tax rules disregard inter-branch interest expense of banks and limit interest deduction permitted for tax purposes for US branches of foreign banks.
  • The IRS’s approach is consistent with the separate entity approach followed by the OECD Report and Art. 7 of the OECD Model Tax Convention, which require the arm’s length principle to be applied to dealings between parts of a single legal entity.
  • Transfers of assets between a foreign head office and a US branch would be expected to be at arm’s length where a tax treaty is applicable.
  • The IRS issued Practice Units in January 2019 examining the creation of a PE through the activities of a dependent agent in the US and the preparatory and auxiliary treaty exception to PE status for foreign enterprises in the US.

Small and Medium Enterprises:

  • The IRS proposed simplified APA procedures for small business taxpayers in 1998
  • Small business taxpayers are defined as US taxpayers with total gross income less than USD 200 million
  • The simplified APA process is accelerated, streamlined, and the IRS provides more assistance to SBTs than in a standard APA
  • The IRS may apply simplified procedures to a particular APA request even if it does not fully conform to small business treatment requirements
  • District examiners are encouraged to suggest APAs to taxpayers if they believe it can speed issue resolution.
  • The IRS also provides transfer pricing advisory services to assist taxpayers, including small and medium enterprises (SMEs), in complying with transfer pricing rules and ensuring appropriate transfer pricing arrangements
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