USA Law and Practice Contributed by: Kim Marie Boylan, Nicholas Wilkins, Christina Culver and Kiara Williams, White & Case LLP
1. Rules Governing Transfer Pricing 1.1 Statutes and Regulations In the USA, transfer pricing is regulated primar - ily under Section 482 of the Internal Revenue Code (the “Code” ). Section 482 allows the Inter - nal Revenue Service (IRS) to allocate income, deductions, credits and allowances among relat - ed 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 standard and provide guidance on how to determine arm’s length prices for intercompany transac - tions. Additionally, the IRS provides other guid - ance such as revenue rulings, revenue proce - dures, 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 cur - rent regime was instituted in 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 lan - guage, 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 develop - ments in transfer pricing. In 1968, the Treasury Department promulgated detailed regulations that included methods (comparable uncontrolled price, resale price, and cost-plus) for evaluating transactions. The Tax Reform Act of 1986 revised Section 482 of the Code by providing more formal require - ments for transactions involving intangible prop - erty, 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 aggre - gation 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 For - eign 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 controlled transaction. Section 482 of the Code defines a controlled transaction as “any transac- tion or transfer between two or more members of the same group or controlled taxpayers” . These rules are primarily concerned 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 circumstanc - es. The transfer pricing rules do not require tech - nical ownership for entities to be “controlled” but allow the IRS to apply a flexible test to determine the existence of a controlled transaction. 3. Methods and Method Selection and Application 3.1 Transfer Pricing Methods Several transfer pricing methods are specified in the US transfer pricing regulations. The options
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