The Internal Revenue Service (IRS) has recently issued the Transfer Pricing Examination Process (TPEP) (Publication 5300(6-2018)), replacing the Transfer Pricing Audit Roadmap issued in 2014. As every transfer pricing issue is unique, transfer pricing examinations are factually intensive and require a thorough analysis of functions, assets, and risks, along with an accurate understanding of relevant financial information The TPEP provides a framework and a guide to best practices and processes to assist with the planning, execution, and resolution of transfer pricing examinations. The TPEP will be shared with taxpayers at the start of a transfer pricing examination, to help them understand the process and work effectively with the examination team – it will be updated regularly based on feedback from examiners, taxpayers, practitioners, and others.
The TPEP is comprised of three sections: Planning Phase, Execution Phase, and Resolution Phase. During the planning phase, the scope of the audit will be determined and the examination team will work with the taxpayer to establish a plan to complete the examination in a timely manner. The examination plan will be issue-focused and contain the issues identified, audit steps, timelines, and communication agreements. During this phase, the IRS issue team will gather, review, and analyze data and compute key financial ratios in order to develop a preliminary working hypothesis. This phase concludes with the opening conference.
During the execution phase, the issue team will conduct interactive discussions with the taxpayer, including using the Information Document Request (IDR) process, to develop the facts. Prior to the taxpayer orientation meetings, the issue team will review and analyze the taxpayer’s transfer pricing documentation and note areas requiring further development, confirmation, or inquiry. The issue team will also review and analyze relevant intercompany agreements and conduct functional analysis interviews, plant tours, and site visits. The taxpayer must provide the documentation within 30 days of an IRS request. Once the issue team has finished the execution phase, it will meet with the taxpayer to discuss all issues before finalizing the Notice of Proposed Adjustment (NOPA) and the Economist Report.
The goal of the resolution phase is to reach an agreement, if possible, on the tax treatment of each issue examined. If a field resolution is not reached, then the normal administrative procedures will ensue.
The TPEP states that penalties should be considered whenever adjustments are made to a tax return. This is in line with a separately issued IRS directive (January 2018) instructing Large Business & International examiners to more aggressively assert penalties in certain transfer pricing examinations. The issue team is directed to discuss the imposition of penalties at the same time as the primary adjustment.
The new transfer pricing examination guidance coupled with the recent directive for aggressive application of penalties reiterate the importance of preparing transfer pricing documentation that is adequate, reasonable, and timely.
Citrin Cooperman’s transfer pricing services optimize the cross-border transfer pricing of goods, services, intellectual property, and financial instruments between related companies. If you have questions, please reach out to your Citrin Cooperman advisor or a member of our International Tax team.
Rita Chung is a partner with 20 years of transfer pricing and tax experience. She advises clients on all aspects of transfer pricing, including preparation of contemporaneous documentation, planning, global restructuring and reorganization of international operations, due diligence, intangible valuation, and audit defense. She can be reached at firstname.lastname@example.org.