The new era of U.S. taxation and transfer pricing

This blog post is a reflection of insights shared during a webinar organized by Quantera Global, featuring two special guest speakers: Guy Sanschagrin and Michael Bredahl from WTP Advisors. 

The landscape of international taxation and transfer pricing is undergoing transformative changes, with the United States at the forefront of this evolution. The recent developments, particularly since the enactment of the Tax Cuts and Jobs Act (TCJA) in 2017, have far-reaching implications for multinational enterprises (MNEs). This blog highlights these changes and their impact on U.S. transfer pricing. 

Although this article focuses on the international landscape, it is important to note that transfer pricing is not just international. Within the United States, controlled transactions among separate reporting states or between unitary groups within a domestic company are subject to state transfer pricing rules. For example, Indiana, Alabama, North Carolina, and Louisiana have been highly active in the transfer pricing arena. In fact, the Louisiana Department of Revenue recently petitioned to collect more than $390 million in additional corporate income tax from ConocoPhillips Company.1 

Overview of the TCJA and its impact 

1. Lower corporate tax rate: The reduction of the U.S. corporate tax rate from 35% to 21% was a strategic move to enhance the competitiveness of U.S.-based MNEs. However, this change comes with its complexities. The shift impacts not just domestic tax planning but also international tax strategies, as MNEs recalibrate their global tax footprint. 
2. Broadened definition of intangible assets: The TCJA’s expansion of the definition of intangible assets to include Goodwill, going concern value, and workforce in place is significant. This broadening necessitates a reevaluation of how MNEs categorize and value their intangibles for transfer pricing purposes, potentially leading to increased tax liabilities and audit risks. 
3. GILTI, FDII, and BEAT: The TCJA introduced measures like Global Intangible Low Tax Income (GILTI), Foreign Derived Intangible Income (FDII), and the Base Erosion and Anti-Abuse Tax (BEAT). These measures are designed to discourage profit shifting and base erosion. Understanding their intricacies is crucial for MNEs to optimize their tax positions and ensure compliance. 
4. Impact on international tax structures: The TCJA’s changes have a profound impact on international tax structures, especially regarding the repatriation of profits and the allocation of income among different tax jurisdictions. MNEs must reassess their operational structures to align with the new U.S. tax regime while ensuring global tax efficiency and compliance. 

Transfer pricing under the microscope 

• Increased IRS scrutiny: The IRS is increasingly scrutinizing transfer pricing arrangements, with a focus on intangible assets. This necessitates a thorough analysis of transfer pricing documentation, ensuring it aligns with the arm’s length standard and reflects the economic substance of transactions. 

• Results-oriented approach: U.S. tax authorities tend to have a results-oriented view to transfer pricing. This implies a focus on the economic outcomes of intercompany transactions rather than just the methods employed. MNEs must ensure their transfer pricing outcomes are justifiable and align with the value drivers of the business. 

• Challenges in the APA process: Recent changes to the Advanced Pricing Agreement (APA) process indicate a move towards reducing tax certainty. MNEs considering APAs must be prepared for a more stringent review process and consider alternative dispute resolution mechanisms. 

• Litigation trends and key cases: Analyzing recent tax litigation trends and landmark cases (e.g., Amazon, Coca-Cola) provides insights into how the IRS and courts interpret transfer pricing issues. Often the courts resolve these cases using a variation of the profit split method. These cases underscore the importance of having a robust and defensible transfer pricing approach and documentation support. 

Strategic implications for global business operations 

1. Navigating complexity in tax planning: Considering the TCJA and heightened IRS scrutiny, MNEs must navigate a complex web of U.S. and international tax rules. This involves a strategic approach to tax planning, considering both U.S. tax reforms and global tax developments. 
2. Preparing for rigorous examinations: The likelihood of increased IRS examinations requires MNEs to have comprehensive and compliant transfer pricing documentation. A proactive approach to documentation and readiness for audits is essential. 
3. Adapting to global tax realignments: As the U.S. aligns more closely with OECD standards, MNEs need to adapt their tax strategies accordingly. This includes understanding the nuances of the OECD’s BEPS (base erosion profit shifting) actions and OECD guidelines and their interaction with U.S. tax laws and transfer pricing regulations. 

Conclusion 

The evolving U.S. tax environment, characterized by the TCJA and increased focus on transfer pricing, presents both challenges and opportunities for MNEs. Navigating this new era demands a deep understanding of the regulatory changes, strategic tax planning, and readiness for greater scrutiny. By staying informed and adaptable, businesses can navigate these changes effectively, ensuring compliance and optimizing their global tax positions. 

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