There have been a string of transfer pricing developments in the United States that have strong implications on reporting requirements for multinational enterprises (“MNEs”). These developments will also increase the risk of a transfer pricing audit by the IRS and foreign tax authorities.
It is not just the IRS that is requiring CbC reporting, but all member countries of the OECD are mandating that multinational taxpayers must prepare CbC documentation. For the time being, the U.S. CbC reporting requirements exempt enterprises having annual revenues of less than $850 million. However, some other countries impose a much lower threshold. Each member country’s tax administration will share the compiled information with other taxing jurisdictions. The CbC sharing will likely cause tax administrations to boost their transfer pricing audits. Such intercontinental transfer pricing audits might begin overseas and end up in the United States. As a result, multinational companies need to be prepared for the new transfer pricing realities. Even if a MNE reports annual revenues less than $850 million, they are still obligated to prepare an annual transfer pricing documentation report that is contemporaneous with their tax return. Failing to do so will open the MNE to severe transfer pricing penalties.
The new guidelines integrate new transfer pricing approaches agreed to by the OECD and G20 countries in the 2015 base erosion profit shifting (“BEPS”) plan final reports. In particular, the 2017 guidelines make major changes on “Aligning Transfer Pricing Outcomes with Value Creation.” The changes relate to essential transfer pricing issues, such as how to delineate a transaction and allocate risk. Changes were also made to “Transfer Pricing Aspects of Business Restructurings.” Lastly, the changes incorporate the CbC reporting requirements discussed above. All of these changes are significant because countries that have transfer pricing regulations commonly follow the OECD guidelines to determine how to price transactions between related-party enterprises.
Multinational enterprises, regardless of size, need to be prepared for their transfer pricing requirements. With the tax authorities of the member countries of the OECD sharing information with each other, each tax authority is in a position to exploit this assembled information as part of a wide-ranging transfer pricing audit.