Stronger IRS Enforcement of U.S. Transfer Pricing Rules

Stronger IRS Enforcement of U.S. Transfer Pricing Rules

[Editor's Note: This is a narrative from Practical Guide to U.S. Transfer Pricing, Third Edition (Matthew Bender)]

One of the most important developments in U.S. transfer pricing in 2012 is the strengthening of the Internal Revenue Service's capability to enforce the U.S. transfer pricing rules (see Chapters 1, 19, 21 and 22). This is part of the earlier reorganization under which all international examiners were transferred from the Large Business & International ("LB&I") industry divisions established in 2000 to the organizations led by the Deputy Commissioner (International). The organizations led by the Deputy Commissioner (International) include International Business Compliance ("IBC"), International Individual Compliance ("IIC") and Transfer Pricing Operations ("TPO").  Transfer Pricing Operations is led by the Director of Transfer Pricing Operations and includes a special Field team of some 60 professionals (called the Transfer Pricing Practice) to improve the examination of transfer pricing; the Advance Pricing and Mutual Agreement group ("APMA") Program combines the former Advance Pricing Agreement ("APA") Program and the groups handling Competent Authority cases involving transfer pricing and permanent establishment with a staff of some 100 professionals.

However, case jurisdiction at the examination level remains with the LB&I Industry Divisions often requiring cooperation on transfer pricing issues among agents assigned to three organizations: agents assigned to the relevant industry division, International Examiners assigned to IBC or IIC and, where the case is deemed important, agents assigned to TPO.  Moreover, other functions of the IRS can be involved in a transfer pricing case at the administrative level, including (i) the Associate Chief Counsel (International) whose concurrence is required in Competent Authority case resolution involving interpreting tax treaties and otherwise is to be consulted when a case is "strategic" (see Chapter 22); (ii) IRS Appeals which has authority to settle cases submitted to it by taxpayers (see Chapter 21); (iii) arbitration panels in cases subject and submitted to arbitration (see Chapter 22).

Transfer Pricing Operations oversees transfer pricing issues.  In addition to the three international compliance organizations, LB&I also includes personnel overseeing many aspects of tax treaty administration.  Led by the Assistant Deputy Commissioner (International) ("ADCI"), this function bears responsibility for the coordination of the IRS's efforts with foreign partners. (The ADCI organization includes the new Treaty Assistance and Interpretation Team (TAIT) and the Exchange of Information Program and the Joint International Tax Shelter Information Centre (JITSIC). The ADCI also oversees and coordinates LB&I's foreign posts, cross-border strategic initiatives, and participation in multinational organizations such as the OECD and Centro Interamericano de Administraciones Tributarias (CIAT).)

As part of the realignment, nearly 800 new employees joined the existing international staff of 600 members, mostly from within other parts of LB&I. [Tamu N. Wright, LMSB Restructure Will More Than Double Staff Size, Adds Transfer Pricing Director, 29 Tax Management Weekly Review 1052, Aug. 9, 2010.]  The IRS has made a significant number of "strategic" hires, including a number from outside the organization, to supplement the realigned group. There will be an increased focus on training, mentoring, and communication that is intended to improve teamwork across LB&I and preserve and enhance the institutional knowledge base. [Molly Moses, IRS's Danilack Describes New LB&I Positions, Addresses Advance Pricing Agreement Hand-Offs, Other Issues, 29 Tax Management Weekly Report 1256, Sept. 20, 2010.]

IRS public pronouncements discussing the realignment indicate that where international issues, including transfer pricing, are concerned, the organization is adopting a more centralized, "teaming" approach that de-emphasizes industry- or territory-specific administration of international tax enforcement. Although the Deputy Commissioner (International) will now have both "program and line authority" over international examiners and transfer pricing specialists in the field, that will not change the way cases are managed. Thus, industry directors and the field organization will continue to serve as the taxpayers' primary point of contact, and will still control the examination process.


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