Transfer Pricing Country Page

Is the jurisdiction part of OECD/G20 Inclusive Framework on BEPS?

The US is an OECD member jurisdiction. However, there are significant differences from the core inclusive framework group approach (and this is expected to accelerate in the coming years).

Relevant Transfer Pricing regulation

Internal Revenue Code (IRC) § 482

Is this regulation aligned with the OECD Guidelines

The US Regulations differ from OECD Guidelines with respect to information requirements contained in the Transfer Pricing Documentation Study in order for the taxpayer to be considered compliant. Additionally, there are significant differences from the core inclusive framework group approach (and this is expected to accelerate in the coming years). For domestic purposes, OECD Guidelines may provide support in certain instances when addressed by the IRS (e.g., APA and MAP) but would not be directly relevant to the application of any US transfer pricing methods. However, if taxpayers pursue competent authority relief from double taxation or a bilateral APA, the OECD Guidelines are relevant and may be used to demonstrate compliance with international principles.

Documentation Threshold for Preparation of Local File/ TP Documentation

No specific threshold.

Documentation Threshold for Preparation of Master File

US does not require the preparation of a Master File unless the US is the ultimate parent of a foreign subsidiary and the global revenue exceeds certain thresholds.

Documentation Threshold for Preparation of Country by Country Report

US does not require the preparation of a Country by Country Report unless the US is the ultimate parent of a foreign subsidiary and the global revenue exceeds certain $850 million.

Submission of Local File, Master File, and CbC Report Required? If so, when?

US does not require the preparation of a Master File or CbC Report unless the US is the ultimate parent of a foreign subsidiary and the global revenue exceeds certain thresholds. A local file, or Documentation Study as it is referred to on the US, is required annualy and to be completed contemporaneously with the taxpayer's tax filing. Form 8975 and Schedule A (Form 8975) are used by filers described under “Who Must File” to annually report certain information with respect to the filer’s US MNE group on a CbCR basis. US MNEs filing Form 8975 and Schedule A (Form 8975) should file a separate Schedule A (Form 8975) for each tax jurisdiction where the MNE group operates and list all of the constituent entities resident in the tax jurisdiction.

If No Submission Required, any Other Deadline?

Yes, If the taxpayer is selected for audit, the transfer pricing report is to be presented within thirty days. It should be noted that the thirty day period is a period to present documentation, not to prepare documentation. Transfer pricing documentation is expected to be completed contemporaneously with the taxpayer’s tax filing. The document remains with the taxpayers records, and is submitted to the IRS only at the time it is requested during an audit of that fiscal year.

Other Documentation Requirements

Penalty protection can only be achieved through contemporaneous transfer pricing documentation containing the ten principal documents as outlined in the US Regulations.

Does TP documentation / Local file Need to be Prepared Contemporaneously with Tax Return Filing (i.e., before filing the return)?

Yes, for penalty avoidance purposes, a taxpayer is considered to have satisfied the documentation requirement if it maintained certain documentation for each year. To the extent that there are changes from the previous year, they need to be reflected.

Preparation of TP Return Required?

Although there is no specific Transfer Pricing Return, the numbers are used on the international forms that are filed along with the tax return.Taxpayers are required to file Forms 5471, 5472 and 8865 regarding transactions with related parties. The transfer pricing that is used on these forms is expected to be arm’s length, or independent market rates as if they were negotiated between independent third parties, and not related parties.

Deadline for TP Return Filing

Tax return filing date (the deadline is the 15th day of the fourth month following the end of the corporation’s tax year. A six-month extension generally is available.)

Key information to be included in the TP Return

Details are provided in the following links:
Form 5471 - https://www.irs.gov/pub/irs-pdf/f5471.pdf
Form 5472 - https://www.irs.gov/pub/irs-pdf/f5472.pdf
Form 8865 - https://www.irs.gov/pub/irs-pdf/f8865.pdf

Local vs Regional Comparables Set

The IRS generally accepts regional comparable sets.

Single-Year vs Multi-Year Analysis

The IRS requires benchmarking analyses do be performed using three years of comparable data. While single-year testing and other tested periods are not outright prohibited by the US Regulations, the three-year tested period is expected by the IRS. Business cycles or macroeconomic impacts must be used to explain deviations from this three-year standard.

Public vs Private Comparables

The IRS accepts only public company data.

Interquartile Range or Full Range

Interquartile Range is required.

Transaction-Based or Aggregate Approach, or Both

Currently, there are no specific guidelines regarding preference of aggregate or transactional testing of intercompany transactions. While testing on an aggregate basis is accepted by the IRS, it is best to apply transaction-based approach for more specific guidance on tax return.

How Often are Benchmarking Sets Renewed (financial update versus full scope BMS preparation)

The benchmarking analysis is expected to be updated annually along with the Transfer Pricing Documentation Study in order to obtain penalty protection. It should be noted that the thirty day period to present the Transfer Pricing study upon audit is a period to present documentation, not to prepare documentation. Transfer pricing documentation is expected to be completed contemporaneously with the taxpayer’s tax filing.

In Case of Delayed Submission of Documentation

There is no penalty for failure to provide transfer pricing documentation as it is not strictly required; however, documentation may help avoid a penalty.

In case of Income Adjustments in Course of a Tax audit

Pursuant to IRC § 6662, taxpayers may be liable for either a 20% or 40% penalty for an underpayment of tax attributable to a substantial or gross valuation misstatement. Refer to IRC § 6662 and Treas. Reg. § 1.6662-6. However, penalties may be avoided by establishing reasonable cause and good faith through taxpayer-provided documentation demonstrating the taxpayer’s application of IRC § 482.

APA & MAP Availability

Taxpayers may request unilateral, bilateral or multilateral APAs. The APA process is administered by the IRS Advance Pricing and Mutual Agreement Program. According to Rev. Proc. 2015-40, taxpayers may request MAP assistance often referred to as a ”competent authority request” or a “MAP request,” if taxation has or is likely to occur that is not in accordance with the provisions of a double tax treaty (DTT) to which the US is signatory.

Applicability of Safe Harbour Rules

There are no safe harbors per se. However, Treas. Reg. § 1.482-2 provides taxpayers the opportunity to use applicable federal interest rates (AFRs) for intercompany loans and advances.

Treas. Reg. § 1.482-2 provides “safe haven interest rate based on applicable Federal rate. Except as otherwise provided in this paragraph (a)(2), in the case of a loan or advance between members of a group of controlled entities, an arm’s-length rate of interest referred to in paragraph (a)(2)(i) of this section shall be for purposes of chapter 1 of the Internal Revenue Code:

(1) The rate of interest actually charged if that rate is:
(i) Not less than 100 percent of the applicable Federal rate (lower limit) and
(ii) Not greater than 130 percent of the applicable Federal rate (upper limit) or
(2) If either no interest is charged or if the rate of interest charged is less than the lower limit, then an arm’s-length rate of interest shall be equal to the lower limit, compounded semiannually, or
(3) If the rate of interest charged is greater than the upper limit, then an arm’s-length rate of interest shall be equal to the upper limit, compounded semiannually, unless the taxpayer establishes a more appropriate compound rate of interest under paragraph (a)(2)(i) of this section.

However, if the compound rate of interest actually charged is greater than the upper limit and less than the rate determined under paragraph (a)(2)(i) of this section, or if the compound rate actually charged is less than the lower limit and greater than the rate determined under paragraph (a)(2)(i) of this section, then the compound rate actually charged shall be deemed to be an arm’s-length rate under paragraph (a)(2)(i).

Additionally, the US Department of the Treasury and IRS recently announced their intent to issue proposed regulations and other guidance on applying the Simplified and Streamlined Approach (“SSA”) method of the OECD for pricing certain controlled transactions involving baseline marketing and distribution activities.

Taxpayers subject to US tax on in-scope transactions may elect to apply the SSA as an elective safe harbor for tax years beginning on or after January 1, 2025. The Treasury intends to implement the substance of the OECD’s February 2024 report on Pillar One Amount B, including supplemental statements released in June 2024, in its entirety.

Critical Transfer Pricing Issues Prevailing in the Jurisdiction, if any

Cost sharing and other IP migration transactions are generally challenged.

Criteria/ Guidelines for Transfer Pricing Audit/ Assessments by Tax Authority

In general, transfer pricing scrutiny during a tax audit may be considered a common practice. Transfer pricing is extensively regulated in the US, and the IRS has recently taken a number of administrative steps to increase its ability to focus on international transactions, with a particular emphasis on transfer pricing. Due to this emphasis, documentation is requested frequently at the outset of any examination of taxpayers transacting with foreign related parties.

However, if the transfer pricing methodology for international transactions is challenged during the initial stages of any audit an adjustment is likely. Once the IRS commits significant resources to the audit, a Notice of Proposed Adjustment should be expected. However, experiences have shown that well-reasoned documentation may potentially reduce the possibility of further scrutiny.

Relevant Regulations and Rulings with Respect to Thin Capitalization or Debt Capacity in the Jurisdiction

Earnings stripping rules under IRC § 163(j) are intended to prevent the erosion of the US tax base of a thinly capitalized corporation by means of excessive deductions for certain interest. As part of the 2017 Tax Cuts and Jobs Act (“TCJA”), the US enacted a new limitation on interest deductions for businesses. With the 2017 TCJA amendment, businesses are permitted to deduct net interest payments for debt against their taxable income up to 30 percent of their earnings before interest and tax.