December 1, 2005 -- The Large and Mid-Size Business Division (LMSB) of the Internal Revenue Service recently circulated a memo regarding the “Guidelines for Requesting Transfer Pricing Documentation” when agents are conducting examinations of returns.  According to Deborah Nolan, Commissioner of the LMSB, “agents should not make any decisions regarding materiality of a potential transfer pricing adjustment before the documentation is requested from the taxpayer.”  In other words, agents have been instructed to always request transfer pricing documentation whenever Forms 5471 or 5472 are attached to their return. When these forms are not attached to the return, agents are inquiring whether the taxpayer had an economic interest and in turn engaged in cross-border transactions.  In the event of such transactions, agents are required to request the documentation.  When no transfer pricing documentation exists, the taxpayers are required to provide information regarding their transfer pricing practices.  Next, the documentation is referred to an International Examiner to determine materiality and any potential pricing adjustments.  Additionally, a 30-day deadline to provide the transfer pricing documents will be enforced and documents prepared after the filing of the return are not valid for purposes of an IRS examination.  

Given the encompassing scope of the LMSB Commissioner’s memo, any entity which participates in cross-border transactions with an entity in which they hold an economic interest should at least have a written document detailing their transfer practices. Those involved with more significant cross-border transactions should consider the need for a Transfer Pricing Study to document and justify the practices being implemented.   

In closing, it is essential that an entity participating in cross-border transactions have at least one of the documents referenced above on file before they are selected for examination by the IRS . Again, if no documentation is present, the IRS agent has little choice but to make judgment calls with regards to possible adjustments to the return.   

For more information, contact Jennifer L. Silvan at 215-564-1900.  

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