If your company has cross-border dealings with a related party, you probably know that transfer pricing enforcement is a high-profile and big-dollar audit priority for U.S. and foreign taxing authorities. Section 482 of the Internal Revenue Code gives the IRS broad discretion to reallocate income by second-guessing your transfer prices and can make it challenging for taxpayers to overcome such adjustments.
At Caplin & Drysdale, we can minimize the expense and burden of your transfer pricing disputes with the IRS. Our attorneys have handled scores of multi-million dollar transfer pricing cases in every stage of the proceeding -- IRS examination, Competent Authority, IRS Appeals, litigation, and the APA process.
Clients for whom we have resolved transfer pricing disputes include U.S. multinationals as well as multinationals based in major North American and European countries, Japan, and tax haven jurisdictions. The industries involved include banking and financial products, pharmaceuticals, electronics, telecommunications, batteries, bearings, motorcycles, medical equipment, biotechnology, crude oil, oil field services, luxury items, industrial equipment, automotive components, fertilizer, and steel. The intercompany transfers at issue have involved, either alone or in combination, the manufacture and/or distribution of tangible goods, the development, sale and/or licensing of intangibles, the incidental and/or regular provision of related-party services, and the making of loans.
We also help clients in legislative and regulatory matters relating to section 482. We have counseled several industry trade associations on potential application of proposed regulations and legislation, including preparation of comments and testimony and meetings with government officials. We also have extensive experience with section 6662 transfer pricing penalty protection documentation, as well as with the preparation of cost-sharing agreements for international groups.
- A U.S.-based multinational in the natural resources industry engaged in a series of related-party transactions which, due largely to foreign legal restrictions, placed more than $100 million profit in a small foreign subsidiary. The company asked us to evaluate its U.S. transfer pricing exposure.
Result: Caplin & Drysdale prepared a report analyzing potential IRS arguments and taxpayer counterarguments, concluded that U.S. transfer pricing law posed little threat if the transaction was properly structured and documented, but suggested ways to minimize future exposure.
- A foreign-based high-tech company sold equipment and services in North and South America through a U.S.-based subsidiary. The foreign parent and its U.S. subsidiary divided the income via a royalty agreement with respect to certain sales and services and a cost-plus mechanism with respect to others. This produced confusion and created unnecessary transfer pricing exposure.
Result: Caplin & Drysdale advised the company how to restructure the relationship to simplify administration and to provide greater transfer pricing protection. We drafted the new agreements and worked with the company to implement them, all within a matter of days.
- A foreign luxury goods manufacturer faced a multifaceted transfer pricing adjustment concerning trademark royalties and import prices for goods sold to U.S. distribution and retail subsidiaries.
Result: Caplin & Drysdale negotiated with the IRS a transfer pricing methodology that resolved the audit adjustment at a fraction of the amounts proposed and established benchmarks for avoiding future disputes.
- A multinational company advanced interest-free funds and provided administrative services at cost to subsidiaries around the world, prompting substantial IRS proposed adjustments.
Result: Caplin & Drysdale successfully defended the company's practice of providing administrative services at cost and negotiated a settlement that eliminated over 90% of the proposed interest adjustments.
If your company is facing an IRS transfer pricing adjustment, or if you want to minimize the likelihood of a transfer pricing adjustment in the future, Caplin & Drysdale can help in the following ways:
- Evaluate your transfer pricing exposure and advise on minimizing future exposure
- Determine an appropriate transfer price or royalty rate for tangible and intangible property
- Determine ownership of intangibles and establish research and development cost-share arrangements
- Defend your transfer prices against adjustment and avoid double taxation through the Competent Authority process
- Defend "at cost" administrative services and interest-free advances
- Prepare Section 6662 transfer pricing reports
- Pursue legislative and regulatory solutions to transfer pricing issues
- Negotiate an advance pricing agreement with the IRS and foreign tax authorities