USA Law and Practice Contributed by: Kim Marie Boylan, Nicholas Wilkins, Christina Culver and Kiara Williams, White & Case LLP
Defending against penalties on audit focuses on pre-emptively maintaining quality documen - tation. Section 6664(c)(1) of the Code provides that an accuracy-related penalty will not be imposed on any portion of an underpayment if the taxpayer shows there was reasonable cause for that portion and the taxpayer acted in good faith with regard to that portion. The extent of a taxpayer’s effort to assess its tax liability prop - erly is generally the most important factor. The IRS also considers the following factors: • taxpayer’s background; • reliability and availability of data and reasona- bleness of data analysis; • correct application of the chosen Section 482 method; • whether the taxpayer obtained a contempora - neous, quality transfer pricing study; and • size of the adjustment in relation to the overall transaction. Documentation should explain the taxpayer’s business and its intercompany transactions, provide an analysis of methods and explain why the chosen method was selected, and provide an economic analysis. The Code provides specific documentation requirements to avoid the net adjustment pen - alty. Section 6662(e)(3)(B) of the Code requires that a taxpayer’s use of the chosen method was reasonable, the taxpayer has documentation on the application of its chosen method, and the taxpayer provides the documentation to the IRS within 30 days of a request. Treasury Regulation Section 1.6662-6(d) further describes the docu - mentation needed to meet the Section 6662(e) (3)(B) exception to the net adjustment penalty. If a taxpayer meets the requirements of Treasury Regulation Section 1.6662-6(d), it is deemed to have established reasonable cause with regard
to a transactional penalty or a substantial under - statement penalty as well. 8.2 Transfer Pricing Documentation The USA has some limited country-by-coun - try reporting (CbCR) requirements. It does not require taxpayers to prepare master or local files. CbCR requirements apply to US persons that are the ultimate parent of a US MNE and have revenue of USD850 million or more for the reporting period. Under Section 6038A of the Code, impacted taxpayers must file a Form 8975 annually by the extended due date of income tax returns (October 15th for calendar year corpo - rate groups). 9. Alignment With OECD Transfer Pricing Guidelines 9.1 Alignment and Differences The USA views its Section 482 transfer pric - ing rules as consistent with the OECD Transfer Pricing Guidelines. The most recent 2022 United States Transfer Pricing Country Profile provided by the USA to the OECD states that “US trans- fer pricing regulations are consistent with the [Guidelines]” . Although they are broadly in align - ment, there are differences between the OECD Transfer Pricing Guidelines and the Section 482 rules. For instance, the USA does not require taxpayers to file master or local file CbCR. 9.2 Arm’s Length Principle Section 482 transfer pricing rules provide a vari - ety of specified methods for determining wheth - er an intercompany transaction was conducted at arm’s length. In general, the rules do not depart from the arm’s length principle, but there are certain exceptions where the rules provide some flexibility to minimally deviate from a strict arm’s length standard. These exceptions include
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