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US Outbound: New LB&I directives both change and clarify IRS transfer pricing procedures

On January 12 2018, the Internal Revenue Service (IRS) released five directives from the large business and international (LB&I) division.

These directives modify IRS examination and advance pricing and mutual agreement (APMA) procedures and further explain existing rules (available at The directives acknowledge that transfer pricing issues make up a substantial portion of the LB&I division's inventory and substantial resources are devoted to these issues. The LB&I division recognises that it needs to manage transfer pricing issues under examination and related resources in the most efficient and effective manner possible. Touching transfer pricing information document requests (IDRs), penalties, cost-sharing arrangements (CSAs), and best method selection, these directives have important implications for transfer pricing planning and controversy management.

The first directive removes the requirement that IRS examiners issue a mandatory IDR seeking Section 6662(e) transfer pricing documentation in all cases involving related party cross-border transactions. Mandatory transfer pricing IDRs will still be issued in all cases under LB&I division campaigns that require such IDRs, and in cases where transfer pricing practice or cross-border activities personnel assigned to a case determine an IDR is needed. However, transfer pricing IDRs can always be issued as warranted by company-specific facts.

The second directive summarises and explains existing law concerning the Section 6662(e) transfer pricing penalty, reminding taxpayers that Section 6662(e) documentation will not insulate them against penalties unless it is both timely and adequate. To be timely, documentation must be prepared before filing a return and provided to the IRS within 30 days of a request. Adequate documentation requires an explicit analysis and conclusion demonstrating that the method selected is the best method. The IRS may look at other available data in determining the adequacy of the documentation.

The third and fourth directives both address cost-sharing arrangements (CSAs). The third directive instructs examiners to cease converting multiple reasonably anticipated benefits (RAB) shares to a single share, pending development of a consistent agency-wide position. However, examiners may still assess whether the multiple RAB shares used are appropriate given the circumstances.

The fourth directive, responding to IRS litigation losses in the Xilinx and Altera cases, orders examiners to stop opening issues relating to stock-based compensation (SBC) in CSAs until the Ninth Circuit Court of Appeals decides the appeal in the Altera case. For examinations already underway, IRS examiners will cease development of SBC issues only if the taxpayer agrees to extend the statute of limitations. Where SBC issues arise in non-CSA contexts, examiners are instructed to consult with division counsel.

The final directive requires IRS examination and advance pricing agreement (APA) teams to receive approval from the IRS treaties and transfer pricing operations before challenging taxpayers' best method selections. Rather than begin with method selection, IRS examiners and APA teams should take the taxpayer's selected method as the starting point for their analysis. The new procedure only applies to method selections used in an APA submission or timely and adequate Section 6662(e) documentation, and does not apply during bilateral APA negotiations between competent authorities.

While a reduction in initial transfer pricing IDRs and the IRS's retreat from contesting certain issues may appear to reduce controversy, taxpayers should exercise caution. These directives are motivated by a concern for using limited resources in the most effective manner. Taxpayers may begin to see the IRS refining and coordinating its positions and issuing IDRs and best method challenges where these are most likely to yield victories. As a result, the effect of these changes may be that fewer taxpayers will have to grapple with transfer pricing inquiries, but those that do will face greater challenges.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG.

Mark MartinCameron Taheri

Mark Martin (, Houston, Cameron Taheri (, Washington, DC, and Thomas Bettge (, Houston
Tel: +1 713 319 3976; +1 202 533 3384; +1 713 319 2173

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