Market overview

There is great uncertainty about what the impending tax policy reform will mean for transfer pricing in the US. President Trump has repeatedly pledged to introduce lower corporate tax rates and a one-off tax amnesty that will help support American manufacturing and business in general. The latter is intended to persuade US companies to repatriate money from lower-tax and zero-tax jurisdictions.

Adding to this uncertainty is a regulatory review being undertaken by the administration. "The US Treasury is currently re-evaluating several regulations issued in 2016 that have some implications for transfer pricing," said Rocco Femia, tax member at Miller & Chevalier. "Among these are regulations under section 367, which relates to outbound transfers of intangible and other property in the context of corporate reorganisations or similar transactions. The regulations under review reversed a long-standing policy that permitted US companies to transfer foreign goodwill and going concern value to foreign subsidiaries without recognising gain," Femia added.

Another development in this area has been the signing of a new exchange arrangement with Canada. This agreement will implement the CbCR standards between the two jurisdictions. Femia stated that, given the magnitude of the parties' trade relationship and investment flows, tax disputes often arise, and potentially result in double taxation. These disputes may intensify with the availability of new data under CbCR. Tax disputes between the two jurisdictions in this area will be resolved through mandatory arbitration. This approach has already proven to be successful in a number of disputes and has proven to be an "effective remedy" in order to avoid double taxation, Femia concluded.

Furthermore, the Amazon case reached its conclusion in March 2017. The US Tax Court reaffirmed its ruling in Veritas case which formally rejected the IRS's approach to buy in payments. This is a significant ruling as "the Tax Court rejected the IRS's attempts to apply principles from newer regulations that were not applicable to the tax years in the dispute," said George Gerachis, head of tax and transfer pricing at Vinson & Elkins.

Moreover, in light of TP changes, "US-based multinationals are concerned about the increased risk of double taxation as other jurisdictions adopt BEPS-inspired rules that conflict with the US rules," said Gerachis. Given the reservation by the US to adopt many of the BEPS provisions, there is a greater likelihood that the income of multinationals will be taxed twice due to the differences in TP rules. "Double tax treaties have mechanisms that are supposed to alleviate double taxation… but this process can take years to play out and increasingly does not result in full relief from double taxation," said Gerachis.

Tax authorities

Internal Revenue Service
77 K Street NE
Washington DC 20002
Tel: +1 202-803-9000

Tax rates at a glance

(As of July 2017)

Federal corporate income tax 35%
Capital gains 35%
Branch tax rates 35%
Withholding tax
Dividends 30%
Interest 0/30%
Royalties from patents 30%
Branch remittance tax 30%

Source: EY

Firm contact details

Fenwick & West