On September 9, the US Department of the Treasury and the IRS published their 2021–22 priority guidance plan describing high priority projects to which they intend to allocate their resources during the period from July 1 2021 to June 30 2022.
Among the projects listed are four significant transfer pricing (TP) projects (a fifth TP item is the IRS’s statutorily mandated annual report on its advance pricing agreement (APA) programme, which is published every year and contains invaluable statistical information, but is not guidance as such).
The style of the guidance plan is sparse: Treasury and the IRS are signalling areas of regulatory focus at a high level, and it is not always clear what stance regulations in a specific area will take. Still, the broader context around the guidance plan items facilitates some informed speculation.
The first substantive TP item is “[r]egulations under §§367 and 482, including regulations addressing the changes to §§367(d) and 482”.
A cross-reference to temporary and proposed regulations from September 2015 suggests that these regulations will very likely include the finalisation, and possible refinement, of temporary regulations on aggregation that were published in 2015, and that sought to capture all value provided in a transaction and coordinate the application of Sections 367 and 482.
These regulations would likely also take into account legislative updates in the 2017 Tax Cuts and Jobs Act (TCJA) such as the updated definition of intangibles in Section 367(d)(4) and the grant of authority to the IRS to require the valuation of transfers of intangible property (including intangible property transferred with other property or services) on an aggregate basis.
In particular, the regulations may provide clarity regarding the broad category of intangibles described in Section 367(d)(4)(G), which includes any “other item the value or potential value of which is not attributable to tangible property or the services of any individual”.
The 2015 temporary regulations were effective for taxable years ending on or after September 14 2015, but lapsed on September 14 2018. It is unclear whether the final regulations would be retroactive. Treasury and the IRS have the authority to finalise the 2015 proposed regulations with a retroactive applicability date, but any new rules introduced in the regulations would likely be in proposed form.
The second item is “[r]egulations under §482 clarifying the effects of group membership (e.g. passive association) in determining arm's length pricing, including specifically with respect to financial transactions”.
The reference to financial transactions suggests that this project will include guidance on implicit support, and may provide guidance on guarantees, which have not previously been addressed in detail by the Section 482 regulations. Implicit support refers to the benefit (e.g. a better credit rating) that an affiliate of a multinational enterprise may enjoy solely as a result of its group affiliation. This project may draw from the 2020 update to the OECD TP Guidelines on financial transactions, which addressed these issues.
The third item covers regulations with three separate components: “(1) coordination of the best method rule with guidance on specified methods for different categories of transactions, (2) discretion to determine the allocation of risk based on the facts and circumstances of transactions and arrangements, and (3) periodic adjustments”.
The first of these components may reflect IRS dissatisfaction with the current structure of the Section 482 regulations, which are primarily organised around transaction types (e.g. tangible goods transfers, intangible property transfers, services, etc.), and therefore are not well-suited for arrangements that involve multiple transaction types. This could potentially signal a move to something more closely resembling the OECD TP Guidelines, which do not cabin available TP methods by transaction type.
The second component suggests dissatisfaction with the existing rules on the allocation of risk, which has played an issue in much recent TP litigation. It is not clear what change this project would entail, but, again, it is possible that it could bring the US regulations more in line with the OECD TP Guidelines, which include a robust discussion on how to analyse risk in controlled transactions.
With respect to the third component, the existing periodic adjustment rules under Treas. Reg. § 1.482-4 are drafted to cover transfers of intangibles that are specifically defined as such in the regulation; consistent with the IRS’s broader push to capture all value associated with transfers, this project could conceivably seek to expand these rules to apply to transfers that include other items in addition to enumerated intangibles.
The final item is an update to Revenue Procedure 2015-41, which covers the IRS’s APA programme. There is a perception that the current requirements for APA submissions may be broader than is needed in some cases, and it is possible that this update could streamline APA requests.
Other changes, such as expanding the IRS’ ability to cover non-TP interrelated issues in APAs (such as the application of the base erosion and anti-abuse tax, or BEAT), are also to be hoped for, though we are not aware of any indications that the IRS is considering this.
Mark Martin
Principal, KPMG
Thomas Bettge
Manager, KPMG
