IRS Releases Temporary Regulations to Coordinate Arm’s Length Standard and Best Method Rule for Transfer Pricing

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Insights  <  IRS Releases Temporary Regulations to Coordinate Arm’s Length Standard and Best Method Rule for Transfer Pricing

On September 14, the IRS issued temporary regulations that address the determination of arm’s-length transfer prices for interrelated transactions among related parties.

Commonly controlled enterprises within a multinational company frequently enter into transactions with each other that may include multiple activities, such as the license of the rights to intellectual property, sale of tangible goods, and selling activities. Transfer pricing regulations require that such related party transactions be entered into at arm’s length (i.e., as if the transactions were entered into among independent enterprises).  When there are interrelated transactions, taxpayers frequently treat each transaction separately when determining whether the transfer price is arm’s length.  The recently released temporary regulations assert that interrelated transactions should no longer be analyzed separately, but should be analyzed in aggregate to provide the most reliable measure of an arm’s-length result.

As a result, the IRS expects the taxpayer to review the overall impact on the company rather than evaluate each transaction separately. To help clarify, we have summarized these regulations for you, as well as provided an illustration of interrelated transactions below:

In the illustration above, there are two interrelated intercompany transactions requiring a transfer price to be at arm’s length.  First, the parent company licensed its proprietary manufacturing process to its U.S. manufacturing subsidiary, granting the right to sell the output throughout North America.  Second, the U.S. manufacturing entity sells its output to a sister company in Canada, which will, in turn, then resell the output to an unrelated third party.

Historically, a taxpayer would analyze each transaction separately when determining an arm’s length price.  Under the temporary regulations, it may be appropriate to evaluate:

  1. the transfer prices charged by ABC Manufacturing Sub. to ABC Distribution Sub. And
  2. the aggregate profits earned by ABC Manufacturing Sub. and ABC Distribution Sub. in evaluating whether the royalty paid by ABC Manufacturing Sub. to ABC Parent Co. for the license of the manufacturing process know-how is an arm’s length amount.

For further clarification, or discussion of other examples of interrelated transactions, please reach out to one of our transfer pricing experts, Andrew Bostian, at or 617-658-5232.

The full IRS document can be found here >>

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein.  Such content, comments, or advice may be based on tax statues, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities.  This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.


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