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Tax Law

Transfer Pricing and Foreign Tax Credit Analysis for Inter-Branch Transactions

by Dale Bond, Elizabeth Sweigart and Alan Fischl *

Conventionally, the structuring and pricing of transactions between US taxpayers and their related parties — or transfer pricing — has been considered the realm of large, multinational enterprises with the US Internal Revenue Service (IRS) focusing on intercompany transactions that give rise to income for US federal income tax purposes. Chief Counsel Advice (CCA) 201349015 — dated September 16, 2013, and released on December 6, 2013 — challenges this existing notion by applying transfer pricing principles to foreign tax credit (FTC) analyses of certain transactions between related parties that would not result in income for US federal income tax purposes, such as those between a foreign branch or foreign disregarded entity (DE) and its US corporate owner. In these cases, the IRS is concerned that inappropriate allocations of income and expense arising from an erroneous application of foreign transfer pricing law could result in a US taxpayer's voluntary overpayment of foreign tax which would be ineligible for a US FTC.

In light of CCA 201349015, corporate tax personnel are well advised to take steps to ensure that appropriate transfer pricing policies and procedures are established and executed — regardless of whether the intercompany transactions result in income for US federal income tax purposes or not — to avoid non-compulsory foreign tax payments that are ineligible for a US FTC.

US Transfer Pricing Rules.In the United States, the power of the IRS to make adjustments for transfer pricing is broad and encompasses both domestic and international transactions. 26 USC § 482 directs that the Treasury Secretary has the power to "distribute, apportion, or allocate" income and expense between two or more businesses — regardless of type of entity, domicile, or ownership percentages — owned or controlled directly or indirectly by the same interests.

The United States has adopted the arm's-length principle as the foundation of its transfer pricing rules which holds that related parties must deal with one another at arm's length, as if they were unrelated. US rules direct taxpayers to develop, analyze, and document intercompany transactions contemporaneously with the timely filing of the annual income tax return to receive protection from penalties if the IRS asserts a transfer pricing adjustment on audit. US income tax treaties provide for application of the arm's-length standard. The IRS often uses 26 USC § 482's application as a guide in assessing whether foreign transfer pricing rules have been correctly applied.


Purpose of the CCA. CCA 201349015 addresses certain principles that the IRS is likely to employ when analyzing certain FTC fact patterns generally.

Although not as broad a statement of IRS policy as an Advice Memorandum — which is signed by an IRS Associate Chief Counsel — a CCA is signed by an IRS Branch Chief and was likely reviewed and approved by the Associate Chief Counsel prior to issuance. As such, in all likelihood it represents that office's litigation position and should be carefully considered by corporate tax personnel.

Specifically, the CCA speaks to the standard for determining the compulsory amount of foreign taxes paid as a result of transactions between a US taxpayer and its foreign branch or DE, or of a foreign branch or DE of its US affiliate filing as part of the same consolidated US federal income tax return. Essentially, the CCA asserts that the application of transfer pricing principles with regard to these types of otherwise disregarded transactions is necessary to ensure that foreign taxes are not voluntarily overpaid as the result of non-arm's length transfer prices resulting in excessive income in the foreign jurisdiction.

It is important to note that while the arm's-length principle is the basis of most transfer pricing regimes globally, not every country hews to it. Consequently, this assertion only applies insofar as the relevant foreign tax law (as modified by tax treaties) also has its basis in the arm's-length principle. In deemed profit jurisdictions or in countries that have adopted a formulary apportionment approach, such as Brazil, the conclusion would not be the same. In these cases, the taxpayer must recognize its burden to demonstrate compliance with the foreign transfer pricing rules such that it does not inappropriately overstate taxable income in the local jurisdiction giving rise to a voluntary tax payment.


The Path Forward. CCA 201349015 provides an important reminder to taxpayers and IRS examining agents that an absence of direct transfer pricing issues under 26 USC § 482 does not guarantee a corresponding absence of voluntary tax issues tied to transfer pricing principles and that the IRS national office is aware of and focused on these issues.

Corporate tax personnel are well advised to conduct a holistic review of all transfer pricing policies and procedures — particularly those applicable to intercompany transactions that may be disregarded for US federal income tax purposes — to ensure that they are being conducted and documented in accordance with the relevant US and foreign transfer pricing rules. Ultimately, ensuring consistent application of the relevant transfer pricing principles across all types of intercompany transactions translates to decreased risk of US FTC disallowances.

* Dale Bond, Elizabeth Sweigart, and Alan Fischl are with PricewaterhouseCoopers LLP. Dale, a Partner at PwC, has nearly 25 years of experience providing international tax and transfer pricing advisory services to clients in a variety of industries including oil and gas, consumer products, and high technology. He holds a BBA and MS in Accountancy from Texas Tech University. He can be reached at Liz, a Director at PwC, has over a decade of transfer pricing, tax controversy, and project management experience. She earned a BA from Rice University and an MBA from the University of St. Thomas (Houston). She can be reached at Alan, a Principal, has over 33 years of experience as an international tax advisor. He served as a legislation attorney with the Congressional Joint Committee on Taxation where he was a principal participant in the development and drafting of the international provisions of the Tax Reform Act of 1986. He is a past Chair of the Foreign Activities of US Taxpayers Committee of the American Bar Association Tax Section. Alan holds an AB from Brandeis University and a JD from Harvard Law School. He can be reached at Learn more about PwC at

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RELATED LINKS: For more discussion of transfer pricing and the arm’s length standard, see:

For coverage of voluntary payment characterization and foreign tax credits, see: