Priority Guidance Plan Portends New Transfer Pricing Guidance

On September 9, 2021, the Treasury Department and the Internal Revenue Service (“IRS”) issued its Priority Guidance Plan for 2021-2022. The Priority Guidance Plan gives the public a sense of what regulations and other guidance the Treasury Department and the IRS might develop over the following 12 months. Among dozens of other pending and potential guidance projects, the Priority Guidance Plan lists the following two new potential section 482 regulations projects:

• Regulations under §482 clarifying the effects of group membership (e.g., passive association) in determining arm’s length pricing, including specifically with respect to financial transactions.
• Regulations under §482 further clarifying certain aspects of the arm’s length standard, including (1) coordination of the best method rule with guidance on specified methods for different categories of transactions, (2) discretion to determine the allocation of risk based on the facts and circumstances of transactions and arrangements, and (3) periodic adjustments.

Treasury has not issued any regulations under section 482 since proposed and temporary regulations (which were never finalized) regarding the so-called “all value” principle and aggregation were issued in 2015. As part of the 2017 Tax Cuts and Jobs Act, section 482 was amended to include the “all-value” principle and aggregation as well as realistic alternatives. Finalizing the 2015 regulations and related section 367(d) proposed and temporary regulations remain on the Priority Guidance Plan. The Priority Guidance Plan also includes a new project for an update to the Advance Pricing Agreement (“APA”) revenue procedure, Rev. Proc. 2015-41.[1] This update would be the first new guidance on APA procedures issued since 2015, not counting the informal guidance that APMA has more recently published on certain specific topics.[2]

While we cannot speculate as to whether the potential new regulations on passive association and the best method rule, risk allocations and periodic adjustments will ultimately be issued, the format they may take (e.g., proposed only or temporary and proposed), or the timing or substantive content of any potential regulations, two general observations can be made. First, the specific issues that Treasury and the IRS have identified as ripe for potential regulations – particularly passive association and allocation of risk – overlap with some of the more significant changes that the OECD recently made in its 2017 overhaul of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “OECD Guidelines”). Because the Treasury Department and IRS view the OECD Guidelines and section 482 regulations as consistent,[3] the OECD Guidelines might provide some high level insight into the possible direction of the possible new regulations. Second, because the Priority Guidance Plan reflects input from a wide range of internal and external stakeholders, it is safe to say that the identified potential guidance projects reflect areas of perceived uncertainty by taxpayers and/or the IRS that may be ripe for dispute. Multinationals should therefore be prepared for these issues to be raised and scrutinized in any IRS transfer pricing audit and should take these issues into account in pre-audit defense planning.

[1] This new APA-related procedural guidance would be in addition to the perennial APA Annual Report, which is separately listed on the 2021-2022 Priority Guidance Plan.

[2] APMA’s recent informal guidance on COVID-19 and electronic signatures and filings, and telescoping of adjustments, were topics of prior blog posts.

[3] See IRS AM 2007-07 (Mar. 15, 2007).

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