USA Law and Practice Contributed by: Kim Marie Boylan, Nicholas Wilkins, Christina Culver and Kiara Williams, White & Case LLP
spective years. The APMA aims to have at least three prospective years remaining in the APA term upon the execution of the APA. In its most recent Annual APMA Statutory Report, dated 27 March 2025, the term length of APAs executed in 2024 ranged from one year to 15 years and averaged six years. 7.8 Retroactive Effect for APAs As mentioned in 7.5 APA Application Deadlines , an APA can cover prospective years as well as prior (rollback) years. Typically, a taxpayer requests that an APA cover rollback years, but the APMA may consider a rollback at its discre - tion even in the absence of a taxpayer’s request. 8. Penalties and Documentation 8.1 Transfer Pricing Penalties and Defences The penalties in transfer pricing cases can be onerous and are either 20% or 40% of the amount of the tax underpayment, depending on the degree of non-compliance. In Section 482 cases, penalties most often result from valuation misstatements, but accuracy-related penalties for understatement of income tax, disregard of rules or regulations, or transactions lacking eco - nomic substance can also apply. Penalties do not stack and, as such, the maximum accuracy- related penalty is 40% – except for in instances of fraud, where the penalty can be 75%. Penalties potentially applicable to transfer pric - ing cases are provided for in Section 6662 and include the following. • Net adjustment penalty – a 20% penalty applies where there is “substantial valuation misstatement” , which occurs when the net Section 482 adjustment exceeds the lesser of
USD5 million or 10% of gross receipts. The penalty is increased to 40% if there is “gross valuation misstatement” , which occurs when the net Section 482 adjustment exceeds the lesser of USD20 million or 20% of gross receipts. • Transactional penalty – a 20% penalty applies where there is a substantial valuation mis- statement in a transfer price of 200% or more or 50% or less of the arm’s length amount. The penalty is increased to 40% if the transfer price is 400% or more or 25% or less of the arm’s length amount. • Substantial understatement penalty – a 20% penalty applies where the understatement of tax exceeds the lesser of 10% of the tax required to be shown or USD5 million (USD10 million for corporations). • Negligence penalty – a 20% penalty applies if the IRS determines a taxpayer acted care - lessly, recklessly, or with intentional disregard of the law. • Non-economic substance penalty – a 20% penalty applies where a transaction lack - ing economic substance is disclosed. The penalty increases to 40% if the transaction lacking economic substance is not disclosed. Mitigating Risk of Transfer Pricing Penalties The net adjustment penalty is most seen in prac - tice. Although penalties can be onerous, tax - payers can mitigate exposure or defend against transfer pricing penalties. Where a taxpayer discovers errors in its tax return before being contacted by the IRS, it can file an amended return. If the amended return corrects the issues giving rise to the tax underpayment and pays all associated taxes, the amended return mitigates much of the penalty exposure. However, in the context of transfer pricing penalties, it is often difficult to anticipate IRS adjustments on audit.
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