The IRS has launched an initiative under the Large Business and International (LB&I) Division to audit U. S. subsidiaries of foreign multinational corporations which operated as distributors in the US for product manufactured by the related party for sale to U.S. customers. The LB&I published a Practice Transaction Unit in 2016 entitled “Inbound Resale Price Method Routine Distributor”. The IRS generally publishes practice units as a model audit guide for IRS agents when auditing certain cases.
Who is affected by this initiative?
- U.S. subsidiaries of foreign multinational companies especially companies with low profit margins or losses over the years.
- These companies are a focus as the IRS argues that if the transactions were happening at arm’s length there would not continuous losses.
How are they being audited?
- During 2016 these audits first took place in five unnamed states. The audits are expected to expand into ten states.
- Once the audit commences, the IRS requests a transfer pricing report within first 30 days of the audit and will retain an international specialist to assist in the audit.
What is needed for support?
- The best audit support is a contemporaneous transfer pricing report with documentation prepared during the tax year and completed prior to filing the tax return.
- A parent’s transfer pricing report can be utilized during a subsidiaries’ audit, but it is important the subsidiary is specifically addressed in the report.
- The IRS will also accept a transfer pricing report completed within the 30 days of the request, but can be harder to complete in a shortened timeframe.
As these audits are increasing in frequency, we urge companies to look at their transfer pricing reports and documentation. For more information on the recent IRS initiative, have a member of Barnes Dennig contact you here, or call 513-241-8313.