USA Law and Practice Contributed by: Devon M Bodoh, Joseph M. Pari and Blake D. Bitter, Weil, Gotshal & Manges LLP
on its US income tax return, rather than focusing on the method and procedures used to set such prices. The OECD standards, by contrast, focus significant - ly less on results and more on whether the transfer prices were established using an arm’s length man - ner; this therefore places considerable emphasis on factors known by the taxpayer at the time the transfer prices were established. Finally, while the OECD standards acknowledge that penalties may play a legitimate role in improving tax compliance in the transfer pricing areas, they do not provide for any such penalty regime. In contrast, the US system employs a detailed penalty regime that includes both transaction penalties and net adjust - ment penalties (that escalate depending on the sever - ity of the transfer pricing deviations and/or tax return results). 4.7 Transfer Pricing Disputes and Mutual Agreement Procedures The USA participates in the OECD International Com - pliance Assurance Programme (ICAP). Accordingly, the procedures the USA takes to handle any interna - tional transfer pricing disputes are generally consistent with those set forth in the ICAP. In addition, enhanced engagement programmes, such as advance pricing agreements (APAs), mutual agreement procedures (MAPs) and other avenues, are available mechanisms in the USA for preventing and/or resolving transfer pricing disputes. With respect to APAs, the USA was the first country to issue a formal, comprehensive set of procedures relating to the issue of binding APAs dealing with the application of the arm’s length standard to intercom - pany transfer prices. The effect of an APA is to guar - antee that the IRS will regard the results of the transfer pricing method as satisfying the arm’s length standard if the taxpayer complies with the terms and conditions of the APA. In addition, when a taxpayer and the IRS enter into an APA, the US competent authority will, upon a request by the taxpayer, attempt to negotiate a bilateral APA with the competent authority of the treaty country that would be affected by the transfer pricing methodology. The IRS has encouraged taxpayers to seek such bilateral APAs through the US competent authority.
Furthermore, MAP arbitration is also available under most US tax treaties. Taxpayers should consult the MAP article under the applicable US tax treaty to determine whether it is an arbitration treaty and the extent to which mandatory arbitration applies under such treaty. Generally, US tax treaties contain a pro - vision which would oblige the USA to make corre - sponding adjustments or to grant access to the MAP with respect to the economic double taxation that may otherwise result from a primary transfer pricing adjust - ment (ie, paragraph 2 of Article 9 of the OECD Model Tax Convention, or the UN Model Double Taxation Convention, is included in the USA’s tax treaties under the Advance Pricing and Mutual Agreement Program). While the provisions contained in these US tax treaties do not require the competent authorities to reach an agreement eliminating double taxation, such treaties do require that the competent authority make a good faith effort to reach such an agreement. Thus, there is no guarantee that competent authority assistance will result in the elimination of double taxation in every case; however, the vast majority of cases are con - cluded with an agreement that avoids double taxation. 5. Taxation of Non-Local Corporations 5.1 Compensating Adjustments Generally, compensating adjustments are allowed/ made. A taxpayer may file a competent authority request with respect to a US federal court’s final deter - mination of its tax liability, but only for the purpose of seeking correlative relief from a foreign competent authority. Such final determinations include litigation settlements with the Office of Chief Counsel or the Department of Justice. If it accepts such a request, the US competent authority will seek correlative relief from the foreign competent authority only for the amount of such final determination and will not authorise competent authority repatriation. 5.2 Local Branches and Local Subsidiaries Generally, local branches are not taxed differently. The imposition of corporate income tax on effectively connected income (ECI) is the equivalent of the tax that would be imposed if a US trade or business were incorporated as a US subsidiary of a foreign corpora -
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