As many of you were celebrating February 14 with your loved one, the IRS chose this date to release its Transfer Pricing Audit Roadmap to the public. To be fair, this 26 page document might have more than thorns as it has the potential for how multinationals might come to a speedier resolution of its transfer pricing disputes with IRS Examination. This contention might sound counterintuitive as the roadmap suggests a two-year Examination cycle in three phases: (1) planning that includes pre-examination and initial risk analysis; (2) execution that includes information gathering and issue development; and (3) resolution. The planning stage, however, includes having the Examination team review any transfer pricing documentation that you may have prepared.
Samuel Maruca – the IRS director of transfer pricing – notes that this roadmap is one part of several documents aimed at having Examiners follow best practices on transfer pricing. The roadmap places emphasis on the facts surrounding your key intercompany policies. It calls for a “compelling story” of the drivers of the multinational’s profitability based on a thorough analysis of the functions, assets, and risks of the key related parties involved in the intercompany prices and an accurate understanding of the relevant financial information. The roadmap also notes that Examiners should use transfer pricing specialists early and often in their transfer pricing evaluations. Maruca also suggests that examiners develop a “working hypothesis” and to continue to think in terms of “what is my theory”.
The execution stage envisions the Examiner requesting information from you on the relevant transfer pricing issues so that the transfer pricing specialist can prepare his report based upon what (hopefully) are agreed upon facts. The resolution phase envisions the Examination team working with you to hopefully reach an agreed upon position on any proposed section 482 adjustments. As Maruca has noted, the roadmap is intended to have a “real engagement” between the Examination team and the representatives of the multinational. The roadmap’s introduction includes the following statement – “if indications are that the taxpayer’s financial results are reasonable, and the taxpayer’s method fits its fact profile, it may not be worth pursuing the issue”.
For multinationals that have prepared thorough transfer pricing documentation, this sentence may be your dozen red roses. The value of a good documentation report is more than just penalty protection as it is your compelling story as to why your intercompany pricing policies are consistent with the arm’s length standard. If your theory is based on the relevant facts and supported by an appropriate application of an appropriate method based on those facts, then the Examination team may quickly understand that your financial results are indeed reasonable. If so, the transfer pricing inquiry may be wrapped up in the planning stage with the desired result of no section 482 adjustment.