USA Law and Practice Contributed by: Kevin Spencer, Kim Marie Boylan, Nicholas Wilkins and Christina Culver, White & Case LLP
White & Case LLP White & Case LLP 701 13th Street NW # 600 Washington, DC 20005 USA Tel: +1 202 626 3600 Fax: +1 202 639 9355 Web: www.whitecase.com
The Tax Reform Act of 1986 revised Section 482 of the Code by providing more formal requirements for transactions involving intangible property, instituting the “commensurate with income” standard. This was followed by a 1988 White Paper that initiated a review and overhaul of the transfer pricing regulations. The overhaul was completed with final regulations in 1994. In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA), which made additional changes to the Tax Reform Act of 1986 (addressing aggregation of intangible property with other property or services). The TCJA also introduced new tax rules that impact transfer pricing, such as the Global Intangible Low- Taxed Income and Foreign Derived Intangible Income provisions. 2. Definition of Control/Related Parties 2.1 Application of Transfer Pricing Rules Transfer pricing rules apply whenever there is a con - trolled transaction. Section 482 of the Code defines a controlled transaction as “any transaction or transfer between two or more members of the same group or controlled taxpayers”. These rules are primarily con - cerned with ensuring that intercompany transactions (ie, transactions between related parties) are at arm’s length – that is, on terms that would have been agreed to by unrelated parties under similar circumstances. The transfer pricing rules do not require technical ownership for entities to be “controlled” but allow the IRS to apply a flexible test to determine the existence of a controlled transaction.
1. Rules Governing Transfer Pricing 1.1 Statutes and Regulations In the USA, transfer pricing is regulated primarily under Section 482 of the Internal Revenue Code (the “Code”). Section 482 allows the Internal Revenue Service (IRS) to allocate income, deductions, credits and allowances among related business entities for all taxpayers. The statute itself is brief; detailed rules to govern transfer pricing are provided in the Treasury Regulations promulgated by the Treasury Department. These regulations set forth the arm’s length stand - ard and provide guidance on how to determine arm’s length prices for intercompany transactions. Addition - ally, the IRS provides other guidance such as revenue rulings, revenue procedures and agency directives. Finally, there is extensive case law governing transfer pricing. 1.2 Current Regime and Recent Changes The basic statutory underpinning of the current regime was instituted by the Revenue Act of 1928; the first sentence of Section 482 of the Code is largely unchanged from Section 45 of the 1928 legislation. Additional statutory language, dealing primarily with intangible property, was added in 1986 and 2017. In the early 1960s, the IRS began to recognise the need for more structured transfer pricing rules. This led to the first significant developments in transfer pricing. In 1968, the Treasury Department promulgat - ed detailed regulations that included methods (com - parable uncontrolled price, resale price and cost-plus) for evaluating transactions.
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