Relevant Rules, Regulations and Statutory Basis:
Transfer pricing regulations are covered by the Treasury Regulations (abbreviated “Treas. Reg.”) § 1.482 (referred to as “The Regulations” or “Section 482”) and Treas. Reg. § 1.6662-6 (“Section 6662”) in the United States (“US”). While the first sentence of Section 482 of the current Internal Revenue Code (“the Code” or “IRC”)[1] was originally drafted in connection with the tax laws providing for consolidated returns, it also forms the basis of the transfer pricing regime in the US. The Internal Revenue Service (the “IRS”) is the primary tax administration agency in the US entrusted with the enforcement of these transfer pricing rules.
Section 482 states: “In the case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion or allocate gross income, deductions, credits or allowances between or among such organizations, trades or businesses, if he determines that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organizations, trades, or businesses”. A second sentence was added in 1986: “In the case of any transfer (or license) of intangible property (within the meaning of Section 936(h)(3)(B)), the income with respect to such transfer shall be commensurate with the income attributable to the intangible.”
Taxing Authority and Tax Law:
The IRS is responsible for direct tax administration in the US. The US tax code is known as the Internal Revenue Code of 1986.
Under broad powers conferred under the IRC (e.g., Section 7805 of the current Code), the Secretary of the Treasury may prescribe regulations for the enforcement of the Code. These Treas. Regs are published in the Federal Register as well as in Title 26 of the Code of Federal Regulations (“26 C.F.R.”).[2] It is these regulations that form the essence of transfer pricing tax law and the regulatory environment in the US. The Regulations provide a taxpayer with detailed guidance in determining its transfer prices.
The final service regulations effective from July 31, 2009 provide detailed guidance on transfer pricing for intra-group services, including provisions for shared services arrangements and the introduction of the services cost method (“SCM”). Temporary and proposed regulations on the treatment of cost sharing arrangements (“CSAs”) issued on December 31, 2008 introduced new specified methods to value buy-in payments and set out an adjustment mechanism that limits the amount of profit earned by a participant in a CSA. Final cost sharing regulations were issued on December 16, 2011 and took effect from that date. They clarify various aspects of CSAs including the valuation and treatment of buy-in payments and the calculation of expected future benefits from the arrangement including the use of discount rates.
Global dealing regulations, which have not yet been finalized, deal with the attribution of profits to a permanent establishment (“PE”) in a global dealing situation and are expected to have an impact on transfer pricing for financial institutions.
For periods beginning on or after 31 December 2017 the US Tax Cuts and Jobs Act introduced various new provisions to counter base erosion and profit shifting by US corporations. These include a base erosion minimum tax; provisions to counter income shifting by intangible property transfers; a new Section 951A requiring a US shareholder of a controlled foreign corporation (CFC) to include in its income the global intangible low-taxed income (GILTI) of the CFC; a restriction on the tax deduction for interest; and provisions to counter the use of hybrid entities or hybrid instruments to obtain a tax advantage.
The IRS issued proposed regulations on 20 December 2018 implementing sections 245A(e) and 267A that were added with the enactment of the Tax Cuts and Jobs Act (TCJA). The proposed provisions under Section 267A clarify the application of the provision, and the guidance under Section 245A (e) defines hybrid dividends and clarifies the interaction between the provision and foreign tax laws. The proposed regulations will be applicable for distributions made after 31 December 2017.
OECD Guidelines Application:
The IRS considers its transfer pricing laws and regulations to be wholly consistent with the OECD Guidelines.[3],[4] Although the OECD Guidelines have limited use domestically, if taxpayers pursue competent authority relief from double taxation or a bilateral APA, the OECD Guidelines would be important in demonstrating compliance with international laws and principles.
[1] United States Code, Title 26, Section 482. Title 26 of the United States Code is better known as the Internal Revenue Code, or “IRC”. Like many titles of the United States Code, the IRC is an official compilation of Federal tax legislation and represents prima facie evidence of positive law.
[2] Citations to the Code of Federal Regulations are customarily made by title and section number, and to the Treasury Regulations by section number only; thus “26 C.F.R. § 1.482-3” and “Treas. Reg. § 1.482-3” are citations to the same regulations section, i.e. the third numbered section of the IRC Section 482 regulations.
[3] Organisation for Economic Co-operation and Development (“OECD”)
[4] Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD, Paris, 1995)